Common questions about DeFi yields, APR vs APY, impermanent loss, and calculator usage.
What is the difference between APR and APY in DeFi?
APR (Annual Percentage Rate) is the base annual rate without compounding. APY (Annual Percentage Yield) includes the effect of reinvesting earned rewards. Formula: APY = (1 + APR/n)^n − 1, where n = compounding periods per year. A 50% APR compounded daily = 64.82% APY. Always convert to the same metric when comparing different protocols.
What is impermanent loss and when does it occur?
Impermanent loss occurs when you provide liquidity to an AMM pool and the price ratio of the two deposited tokens changes. The AMM automatically rebalances, leaving you with more of the declining token. Formula for a 50/50 pool: IL% = (2 x sqrt(r)) / (1 + r) − 1, where r = new price / initial price. The loss is "impermanent" because it disappears if prices return to the original ratio.
How is simple staking yield calculated?
Simple yield = Principal x (APR/100) x (Days/365). For example, staking $10,000 at 10% APR for 90 days: $10,000 x 0.10 x (90/365) = $246.58. This is interest without reinvestment. For compound growth, use the compound yield module which applies FV = P x (1 + r/n)^(n x t).
Is DeFi yield income taxable?
In most countries yes. In the USA, the IRS treats staking rewards and yield farming income as ordinary income at fair market value when received. The UK, Australia, Canada, and Germany have similar treatment. Tax rules for DeFi are still evolving. Always consult a qualified tax professional who specialises in cryptocurrency before earning yield.
Can I trust the APR rates shown in DeFi protocols?
APR/APY rates displayed on DeFi protocols are real-time estimates based on current conditions. They can change significantly — sometimes within hours — as capital flows in or out, token emissions are adjusted, or trading volume changes. Never assume a high current rate will persist. This calculator's results are only as accurate as the APR you enter.
What is the compound interest formula used here?
Future Value = Principal x (1 + APR/100/n)^(n x years), where n is compounding periods per year: 1 (yearly), 12 (monthly), 52 (weekly), 365 (daily). Profit = FV − Principal. Effective APY = (1 + APR/100/n)^n − 1. This is the standard compound interest formula used globally in finance.
Does impermanent loss mean you always lose money?
No. Impermanent loss is the loss compared to simply holding (HODLing) the tokens. Even with IL, your absolute value can still be higher than your deposit if the underlying tokens appreciated enough. Also, trading fee income earned by the pool can offset IL. The "impermanent" label means if prices return to entry levels, IL disappears entirely.
Does higher compounding frequency always give more yield?
Yes, but the marginal benefit decreases at higher frequencies. Going from yearly to monthly compounding makes a meaningful difference. Going from daily to hourly adds very little. On 10% APR: yearly compounding = 10% APY; monthly = 10.47%; daily = 10.52%. At higher APRs the gap is more meaningful but still not dramatic.
Are all DeFi protocols equally risky?
No. Risk varies enormously. Lower-risk indicators include: multiple independent audits, long track record with no exploits, transparent team, conservative design, and use of established codebases. Very high APRs above 100% are usually driven by temporary token emissions that often decline rapidly in value. Higher yields almost always indicate higher risk — there is no free lunch in DeFi.
Can this calculator be used for non-Ethereum DeFi?
Yes. The maths is identical for all blockchain networks: Solana, BNB Chain, Avalanche, Polygon, Arbitrum, and others. Simply enter the APR from whichever protocol you are evaluating. The formulas for compound interest, APR-to-APY conversion, and impermanent loss are universal and chain-agnostic.
Why is this tool labelled as educational and not financial advice?
This calculator provides mathematical estimates based solely on user inputs. It cannot account for fluctuating rates, token price changes, gas fees, smart contract risks, liquidity constraints, or regulatory changes. Financial advice requires a full understanding of your personal financial situation, goals, and risk tolerance, which only a qualified professional can provide.
What is auto-compounding and how does it affect yield?
Auto-compounding vaults automatically reinvest earned rewards back into the position multiple times daily, converting APR into near-APY returns. They save gas costs versus manual compounding. However, they charge a performance fee (typically 2%–20% of yield). Subtract this fee when comparing auto-compound APY against a simple staking APR to get a fair comparison.
