Annual Percentage Yield as known as APY gives you an estimate of how much your money would earn in a year.
APY is the actual rate of return that will be earned in one year if the interest is compounded.
Compound interest is added periodically to the total invested, increasing the balance. That means each interest payment will be larger, based on the higher balance.
The more often interest is compounded, the better the return will be.
APY standardizes the rate of return. It does this by stating the real percentage of growth that will be earned in compound interest assuming that the money is deposited for one year.
Formula for APY:
r = period rate
n = number of compounding periods
For example, if you deposited $100 for one year at 5% interest and your deposit was compounded quarterly, at the end of the year you would have $105.09. If you had been paid simple interest, you would have had $105.
The APY would be (1 + .05/4)4 - 1 = .05095 = 5.095%.
It pays 5% a year interest compounded quarterly, and that adds up to 5.095%. That's not too dramatic. However, if you left that $100 for four years and it was being compounded quarterly then the amount your initial deposit would have grown to $121.99. Without compounding it would have been $120.
X = D(1 + r/n)n*y
= $100(1 + .05/4)4*4
X = Final amount
D = Initial Deposit
r = period rate
n = number of compounding periods per year
y = number of years
Now for Lending - Earn APY, it frequently changes because it depends on the number and amount of borrowers using our Lending platform.
Net APY Calculation:
1. Convert all supplied and borrowed asset amounts to a single asset (like USD or ETH).
2. Calculate the sum of (suppliedAmount x supplyApyAsDecimal - borrowedAmount x borrowApyAsDecimal) for all underlying assets.
3. If the calculated sum from the previous step is > 0, then
Net APY = 100 (sum / totalSuppliedValue)
If the calculation from the previous step is < 0, then
Net APY = 100 (sum / totalBorrowedValue)
If the calculation from the previous step is 0, then Net APY = 0.