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APY Calculation
In leveraged farming positions, your yields have 3 earning parts and one part of borrowing interest.
Total APR% = Yield Farming Rewards + Trading Fees + ALPACA rewards - Borrowing Interest
- Yield Farming Rewards are the DEX rewards(e.g., CAKE, MDX, BSW, etc.) that the protocol sells and auto-compounds into your LP. You receive these yields as additional LP tokens, meaning the number of LP tokens in your position grows over time. You can view your current LP tokens amount by hovering over your position's Position Value.
- Trading fee rewards accumulate internally within your LP tokens. You receive these yields through your LP tokens accruing in value, meaning your LP tokens are worth more over time. (Similar to how ibTokens work)
- ALPACA rewards accumulate based on your position’s debt size. You receive these yields by manually claiming them at the top right of the Your Positions dashboard.
- Borrowing interest is the component that your above three revenue sources cover to pay the users loaning you their funds so you can use leverage. Borrowing interest reduces your equity value. It accrues overtime and get paid when you close the position.
Please note that all the APR% is calculated based on your EQUITY value and NOT your total position value.
APY is how much you'll earn at the end of the year if you take all your yields and regularly add those on top of your principal into the pool, compounding your equity to earn yields on your yields. This is a powerful process that quickly becomes exponential over time.
APR, on the other hand, is simple interest that shows what your direct earnings would be at the end of the year if you earned yields only on your initial principal.
Now, here's the key, when you first open a position or make a deposit, APR=APY. Can you see why? Because you have no yields to redeposit! Over time, as you earn yields, APY starts to soar above APR as you redeposit those yields and begin generating compounded earnings. So, in summary, it takes time for your earnings to reach the standard of APY.