With decentralized finance, DeFi, growing daily, you can invest and earn without complicated procedures. You can earn passive income by staking, yield farming, providing liquidity, lending your digital assets, and using decentralized applications (dApps) powered by smart contracts.
However, you must keep track of how your investments are performing and the percentage increase you earn on each DeFi protocol asset. To track these profits, you'll need to know your investment's Annual Percentage Yield (APY).
What is APY?
The APY is the investment's annual rate of return, which includes compound interest that accumulates or grows over a year. Interest earned on the original deposit is compounded with interest earned on that interest.
Similarly, in DeFi, the annual percentage yield (APY) calculates the amount earned on an asset investment in a money market account over a year. APY is the annual compounded return on your asset investment, expressed in percentages. It is calculated by adding interest to both the initial investment and the interest earned on that investment.
In other words, APY takes compounding effects into account. Compounding interest refers to the interest you earn on your asset. It refers to the amount received on the initial investment (the money you put into the protocol) and the accumulated interest. Compounding allows you to make money over time.
In the crypto world, APYs are constantly changing. As a result, the APY displayed on exchanges, liquidity pools, and staking pools is frequently an approximation. The APY of a market asset rises as its supply and demand volatility increases.
Calculate APY in terms of Daily Interest:
Because APY pays interest on both your initial capital and the interest earned on it, it is best to convert the APY to daily interest so you can see how much you make on your investment daily.
Daily yield = total number of staked tokens × (APY for the staked token ÷ 365)
For example, what is your daily yield if you invest $10,000 in a DeFi scheme with a 15% APY? Let us all find out together.
Total number of staked tokens = $10,000
APY for the staked token = 15%
Daily yield = $10,000 × (15% ÷ 365)
Daily yield = $4.11
Since the DeFi scheme invested promises 15% APY, your $10,000 investment will earn $4.11 per day.
Investment in Crypto that uses APY
Yield farming is the practice of lending or staking your cryptocurrency coins or tokens to generate the highest possible yield in transaction fees or interest while minimizing risk. Yield farmers move their assets around different DeFi protocols in search of the highest APY available. This is a form of trading strategy for yield farmers.
Staking is storing tokens in a smart contract in exchange for more tokens of the same crypto asset. As a result, you can earn by participating in PoS networks, which bring stakeholders together to verify the network. The more coins you contribute to the network, the more likely you are to be a validator adding blocks to the blockchain, and the more profit you earn.
Crypto loans function similarly to traditional loan systems, only this time, there is no paperwork. When you commit your assets on DeFi protocols that enable lending and borrowing, you receive interest on your asset when a borrower repays. However, funds security is guaranteed, as the borrower must provide collateral worth more than the intended lending amount, which will be remitted to you if the person defaults on payment.
Factors that Affect Crypto APY
Supply and Demand
You can effectively lend your crypto asset to earn interest. However, market dynamics can influence rates because interest is charged based on demand for the specific crypto asset. Therefore, borrowing interest rates are generally lower when there is a lot of supply and higher when there isn't. Similarly, the APY of cryptocurrencies fluctuates according to each coin's level of demand and liquidity.
The compounding period, which can vary, also impacts the APY calculation. Remember that the APY rises as the number of compounding periods rises. However, The more opportunities for your interest to grow, the more money they can make.
In Crypto, inflation is adding new tokens to the blockchain network at a predetermined rate. Therefore, the rate of return in a particular network is affected by the inflation rate. For example, if your coin inflation rate is higher than the APY, your income will decrease as quickly as it will increase.
You now understand what the term APY means and how you can track your investment knowing its daily yields. However, the APY encryption for a particular encryption project is determined by the market demand and supply of the project's assets. As a result, increased demand for the asset means a higher APY. In addition, the longer the period for compounding profit, the higher the project's APY.
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