Interest rate guide

Disclosure

The below is educational information provided to help the user understand rates of return. This is not investment advise and all information should be validated.

Important: The stated AP[[R]/[Y]] (the 'Rate') is denominated in terms of [RELEVANT TOKEN], not USD or other fiat currency. The Rate is a forward-looking projection based on good faith belief of how to reasonably project results over the relevant period, but such belief is subject to numerous assumptions, risks and uncertainties (including smart contract security risks and third-party actions) which could result in a materially different (lower or higher) token-denominated AP[[R]/[Y]]. The Rate is not a promise, guarantee or undertaking on the part of any person or group of persons, but depends entirely on the results of operation of smart contracts and other autonomous systems (including third-party systems) and how third parties interact with those systems after the time of your deposit. Even if the Rate is achieved as projected, you may still suffer a financial loss in fiat-denominated terms if the fiat-denominated value of the relevant tokens (your deposit and any tokens allocated or distributed to you pursuant to the Rate) declines during the deposit period.

https://www.investopedia.com/personal-finance/apr-apy-bank-hopes-cant-tell-difference/

https://en.wikipedia.org/wiki/Rate_of_return

Let's describe this logic step-by-step for yield farming strategies.

For example, you have $1000 A and invested it in strategy X

Strategy profit

Strategy X puts your asset in a project pX with standard Harvest logic (periodically claims rewards and adds them back to the project)

Project pX has $1M TVL pTVL and $100,000 of rewards pReward that will be provided over a 30 day period pPeriod

Your $1000 is 0.1% of the Total Value Locked (TVL) A / pTVL

This means your asset will receive $100 during the month pReward * (A/pTVL)

In DeFi when comparing profits, most projects show APR, but call it the APY.

For example, you can multiply your monthly profit for 12 months of the year and get an annual profit figure.

Of course, 12 months with the same profit and TVL is an unrealistic situation. Let's call this the "Instant APR" iAPR , because it is the APR for the current situation and will change as TVL and rewards change.

For your $1000 it will be ( pReward * (A/pTVL)* 12 = $1200) ⇒ $1000 / $1200 = 120% APR

But your asset is under the strategy's control. It claims profit every day and adds it back into the project. In this way, it generates additional profit the longer you hold it, due to the principal of compounding returns.

Daily profit will be pReward /pPeriod = $100,000 / 30 = $3333.33.

For your share of 0.1% it will be $3.30 per day.

So after the first day your total stake will be $1003.30.

Your new share % will be $1003.30 / $1M = 0.1003%

For day 2 you will receive $3.44, due to the compounding effect from day 1. Each day thereafter, your daily profit will continue to increase.

Your final compounded annual profit is the APY, but don't forget the project only has rewards for the month!

APY is calculated for the year so that we can compare different projects with different periods of work.

Let's call it instant APY or iAPY

The formula for APY calculation is a bit complex:

(Math.pow(1.0 + ((apr / 100) / period), period) - 1.0) * 100

For 120% iAPR it will be 231.36% iAPY

For most strategies, Harvest Finance has a rule that 70% of profits go directly to stakers, with the remaining 30% going to FARM buyback. Remember to include this when calculating final APY%.

Weekly FARM reward

Every week Harvest Finance mint FARM tokens and send it to the stake contracts. The amount of FARM tokens minted decreases each week by 4.44%.

For traditional stake contracts (not AutoStake), it means that each new 7 day period of rewards start with this FARM amount.

This provides additional yield for each strategy. Calculate it with the same rule and add to the final APY%.