Yield Farming: What an Advertised APY Actually Pays

APR and APY are not the same number, and pools quote whichever flatters

APR is a simple rate: the periodic emission multiplied out over a year with no compounding. APY assumes you harvest and redeposit, so the interest earns interest. The gap between them is enormous at the rates farms advertise. A pool paying 120 percent APY with daily compounding is emitting at 78.93 percent APR, because 365 × (2.20^(1÷365) − 1) = 0.7893. Run it the other way and a pool emitting 120 percent APR, compounded daily, reports 231.36 percent APY, because (1 + 1.20÷365)^365 − 1 = 2.3136. The same underlying farm can honestly display 78.93, 120 or 231.36 depending on which pair of letters follows the number.

The APY figure also hides an assumption you may not be able to meet: that you compound daily. Compounding costs a transaction each time, and on a chain where a harvest-and-redeposit round trip costs $20, daily compounding on a $10,000 position spends $7,300 a year on gas. The advertised APY was computed as if that were free. On a cheap chain the assumption is closer to reasonable; on a congested one the honest number for a small position is the APR, not the APY. Before you compare two farms, check that both figures carry the same label — a 60 percent APR farm can pay more than a 90 percent APY farm once the compounding assumptions are matched.

Where the yield goes: four subtractions that apply to almost every farm

The first and largest is the reward token itself. Farm rewards are paid in a token whose only demand comes from people who want to farm it, and whose supply is being minted continuously to pay you. Selling pressure from every other farmer is structural, not sentiment. In the worked example a 45 percent fall over 90 days turns $2,146 of headline rewards into $1,180 — the single biggest line in the table, and the one no APY figure ever adjusts for, because the APY is quoted in units of the reward token and converted at today's price. The second is impermanent loss. A price ratio of 1.5 between the two sides of the pair costs 2 × √1.5 ÷ 2.5 − 1 = 2.02 percent of the deposited value, which is $202 here. That is a mild move; a doubling costs 5.72 percent.

The third is transaction cost, and it is the one that scales inversely with your position. Approving the tokens, depositing, harvesting three times and exiting is six transactions; at $20 each that is $120. On a $10,000 position that is 1.2 percent — annoying. On a $1,000 position it is 12 percent, which eats most of what is left, and on a $200 position the farm is a donation to validators. The fourth is the platform's own cut: an auto-compounding vault typically keeps 10 percent of the yield as a performance fee, sometimes with a management fee on top and occasionally a withdrawal fee that only appears when you leave. Here it costs $118, taken on the $1,180 of reward value that survived the token's decline.

How to read a farm's front page without being sold to

Start by asking where the yield comes from. A pool paying out of swap fees is sharing revenue that traders actually generated, and that yield can persist. A pool paying out of freshly minted governance tokens is diluting its own holders to attract deposits, and the rate is a marketing budget with an end date. The two look identical on a dashboard and behave nothing alike. If the headline number moves inversely with total value locked — halving when deposits double — you are looking at a fixed emission split among more people, which tells you exactly what happens when the incentive campaign ends.

Then decide your holding period before you deposit, because three of the four subtractions depend on it. Gas is fixed and gets cheaper per day the longer you stay; impermanent loss grows with how far the pair drifts, which grows with time; the reward token's decline compounds with every day you hold it unsold. A farmer who harvests and sells daily avoids most of the token decay and pays far more gas; one who leaves everything to compound pays no extra gas and takes the full decline. Neither is right in general — but the calculator lets you run both and see which one your position size and chain actually favour. Whatever comes out, compare it with what the same money would have done simply held in the two underlying assets. That is the benchmark a farm never shows you.

Frequently asked questions

Is a farm advertising 1,000 percent APY a scam?

Not necessarily, but the number is almost never achievable. A four-figure APY comes from heavy emission of a new token into a pool with little capital in it, and it falls as soon as deposits arrive — that is arithmetic, not deception. What matters is that the rate is quoted in a token you have to sell, and the sale of everyone's rewards is what makes the price fall. Treat any headline above roughly 50 percent as a statement about emissions, not about what you will receive.

Does the calculator include impermanent loss?

Yes, if you give it a price change for the pair, because impermanent loss depends only on the ratio between the two tokens' moves. It is worth entering even a guess: at a ratio of 1.5 the cost is 2.02 percent, at 2 it is 5.72 percent, at 4 it is exactly 20 percent. Farms on a stablecoin pair have almost none of it while both pegs hold, which is why their much lower advertised yields are often the more honest ones.

Why does the reward token almost always fall?

Because the farm mints it continuously to pay depositors, and most depositors sell it immediately to lock in the yield. New supply arrives every block; demand comes only from people who want to hold a governance claim on the protocol. Unless the protocol has real revenue and a mechanism that routes it back to the token, the two forces are not balanced. That is why the price decay line is usually the largest subtraction between the advertised APY and the money in your wallet.