How Is the Annual Percentage Yield (APY) of a Liquidity Pool Calculated?
The APY of a liquidity pool is primarily calculated by annualizing the historical trading fees earned by the pool's liquidity providers, divided by the total value locked (TVL). If the pool also offers yield farming rewards, the value of those rewards is added to the fee calculation.
The calculation assumes the current rate of fees and rewards will continue for a year.
Glossar
Yield Farming APY
Calculation ⎊ Yield farming APY represents the annualized rate of return on capital deployed in decentralized finance liquidity pools, incorporating both base interest and compounding effects.
Total Value Locked
Collateralization ⎊ Total Value Locked, within decentralized finance, represents the aggregate value of crypto assets deposited in smart contracts, functioning as collateral for various protocols.
Annual Percentage Yield (APY)
Yield ⎊ Annual Percentage Yield calculates the effective rate of return on an investment over a year, incorporating the effect of compounding interest.
Compounding Frequency
Definition ⎊ Compounding frequency refers to the number of times per year that interest or rewards are calculated and added back to the principal investment.
APY
Definition ⎊ Annual Percentage Yield (APY) represents the standardized, annualized rate of return on an investment, accounting for the effect of compounding interest.