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What Is APY, APR, and Impermanent Loss? Crypto Terms EXPLAINED - YouTube
Channel: CoinGecko
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when you first step into the world of
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cryptocurrencies all of the jargon from
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the blockchain can be confusing while
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certain blockchain related terms may be
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familiar some investing terms are
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difficult to comprehend apr apy il what
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do these abbreviations mean and how does
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everyone seem to understand these terms
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in this video we're gonna break them
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down for you if you like to stay updated
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to all things crypto make sure you click
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on that subscribe button and turn on the
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notification also follow us on twitter
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instagram and facebook for all the
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latest crypto updates let's begin apy
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stands for annual percentage yield and
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it is a way of estimating the amount of
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money generated over the course of a
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year in lending and yield farming
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protocols some factors to consider where
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the compounding returns are concerned
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include the fees token price interest
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earning procedures and the sorts of
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crypto assets offered these can differ a
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lot from protocol to protocol simple
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interest is earned when the apy is the
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same as the interest rate paid on a
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person's investment when the apy is
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larger than the interest rate it means
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that the interest is compounded meaning
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the investor is receiving interest on
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the interest he has accumulated the
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standard way of calculating apy is with
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this formula where r is the stated
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annual interest rate and n is the number
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of compounding periods each year however
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when it comes to crypto apy is computed
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variably depending on how frequently the
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yield is dispersed for example rebase
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tokens such as olympus wonderland and
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klima allow depositors to earn rewards
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every epic usually every eight hours
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this means that your deposited tokens
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will effectively compound three times
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within a day resulting in a much higher
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apy than if your tokens were only
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compounded daily the apy might change
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depending on the token price and the
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total quantity of deposits in crypto
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some systems offer returns in the form
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of additional tokens which users must
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manually claim sell and compound against
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their initial payment the general rule
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of thumb is that the higher the number
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of compounding periods the higher the
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apy sometimes a protocol may display the
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apr or annual percentage rate instead of
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apy the key difference is that apr can
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be regarded as simple interest where the
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effects of compounding are not included
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apr or annual percentage rate is the
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reward that investors may gain by making
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their crypto tokens available for
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lending taking into account interest
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rates and any other cost that an
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investor must pay apr often known as
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simple interest provides defy users with
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a figure that can be readily compared to
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other protocols rates unlike apy
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compounding interest is not included in
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the apr some cryptocurrency exchanges do
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not give you the freedom of lending out
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your coins those that do however offer a
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variety of charges these interest rates
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vary greatly depending on the type of
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loan or currency you lend as you may
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have guessed apy and apr are nearly
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identical tools that provide different
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results both relate to the annual
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investment income however thanks to
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compounding apy delivers a bigger return
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profit although both terms are related
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to the rate of return on your deposits
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apr does not take compounding into
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account but apy does which is why the
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apy for any investment is normally
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considerably greater than the apr this
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image here is the apr for trader joe's
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farms which shows you both the yield for
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providing the liquidity and the bonus
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returns from staking the lp tokens in
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the corresponding farm assuming your
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yield is compounded every month
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investors could earn interest on top of
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the interest earned from previous months
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resulting in additional yield that can
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be pretty significant in the long term
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impermanent loss happens when liquidity
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providers receive different amounts of
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assets upon withdrawal compared to when
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they first deposited them into a
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liquidity pool wait but why does this
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happen this happens when there are
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changes in token price which affects the
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composition of the liquidity pool
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resulting in you having slightly less or
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more of a particular token for example
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even if you deposited your assets at a
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50 50 ratio at the start
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say if and die there is no guarantee
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that you will receive the same amount of
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each asset in the end liquidity
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providers might receive a lower value of
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asset compared to simply holding the
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tokens in their wallet instead here's
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another example let's assume that the
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price of 1 if is equal to 1000 usdc and
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alice wants to provide liquidity to the
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if usdc pool she needs to deposit 1000
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usdc for every unit of if she plans to
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deposit alice deposits 1 f and 1 000
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usdc into the liquidity pool which now
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holds 10 if and 10 000 usdc in total in
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other words alice's 2 000 deposit now
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makes up 10 of the pool which has
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liquidity of 100 000.
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[Music]
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now if no one withdrew their liquidity
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it should remain constant at one hundred
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thousand however the ratio of if and
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usdc in the pool has now changed
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consisting of less f and more usdc at a
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price of 4 000 usdc there should be 5 if
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and 20 000 usdc currently in the
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liquidity pool since alice owns 10
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percent of the pool she would receive
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0.5 if and 2000 usdc if she chooses to
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withdraw her assets which would be worth
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four thousand dollars
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if she had just held one if and 1000
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usdc instead her funds would have been
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worth five thousand dollars by providing
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liquidity we can see that alice made
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less money than she could have made by
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just holding even though she didn't
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technically lose her initial capital she
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experienced what we know as impermanent
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loss which becomes permanent after she
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withdraws her tokens this is not
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accounting for the swap fees she might
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have also received for being a liquidity
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provider investors may now put their
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assets to work in a variety of ways
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thanks to defy rather than keeping their
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tokens and their wallet for the long
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term they may utilize them to create
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revenue by providing liquidity to other
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platforms more often than not the price
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of the newly minted governance tokens
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will skyrocket either due to excessive
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demand or low liquidity in either case
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the apys for staking and providing
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liquidity balloon to massive proportions
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which will attract even more depositors
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however as we've seen on numerous
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occasions this form of liquidity mining
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is unsustainable and will not last for
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long as such it is essential to
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determine how the yields are generated
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and calculated high apys won't count for
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much if the protocol doesn't survive for
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long we hope you found this video
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extremely helpful and that you now have
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a clear understanding of what each term
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means and the differences between them
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if so do hit that like button and
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subscribe do you have any other terms
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you can't seem to understand and would
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like us to make a video on leave them in
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the comments below and let's educate
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each other
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you
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