How to calculate the profitability of yield farming? 📝

Typically, prospective profitability of yield farming is calculated on an annualized basis. This is a rough estimate of the profit you can get for a year.

👉 Annual Percentage Rate (APR) and Annual Percentage Yield (APY) are commonly used metrics. But while APR and APY may sound the same, they are quite different and not created equal. For starters, APY, or annual percentage yield, takes into account compound interest, but APR, which stands for annual percentage rate, does not. Note: APR and APY can be used interchangeably.

👉 It should also be remembered that these are only rough estimates and forecasts. Even in the short term, the size of the reward is difficult to accurately estimate. Why? Profitable yield farming is a highly competitive and fast-growing market where rewards often fluctuate. If a certain profitable farming strategy works for some time, then many farmers begin to use it, thereby reducing the possibility of obtaining high income 😕

👉 DEFI-industry needs its own metrics to calculate profit as APR and APY are inherited from the traditional markets. Due to the fact that all events in the DeFi industry are happening very quickly, it is better to use metrics of weekly or even daily implied returns.

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