Question 1

What is APR vs APY in DeFi?

Accepted Answer

APR (Annual Percentage Rate) is the stated rate before compounding. APY (Annual Percentage Yield) accounts for compounding frequency. Formula: APY = (1 + APR/n)^n - 1, where n is compounds per year. Daily compounding at 20% APR yields ~22.1% APY.

Question 2

What is impermanent loss?

Accepted Answer

When providing liquidity to an AMM (e.g., Uniswap), if the price ratio of the two assets changes, you may have less value than simply holding. IL = 2√(k)/(1+k) - 1 where k is the price ratio. IL is "impermanent" because it can reverse if prices return.

Question 3

How does compounding affect yield?

Accepted Answer

More frequent compounding increases effective yield. Daily compounding at 20% APR gives ~22.1% APY; monthly gives ~21.9%. On L2, compound frequently to maximize yield while gas costs are low.

Question 4

What are stablecoin pools?

Accepted Answer

Stablecoin pairs (e.g., USDC/USDT) have lower impermanent loss but typically lower APR (5–15%). Volatile pairs (e.g., ETH/USDC) have higher APR (20–100%+) but significant IL risk when prices move.

Question 5

How do gas costs affect yield farming?

Accepted Answer

Each compound (harvest + reinvest) costs gas. On Ethereum mainnet, frequent compounding can eat 10–50% of yield. Use L2 (Arbitrum, Base) where gas is cheap, or compound less frequently.

Question 6

Is yield farming risky?

Accepted Answer

Yes. Risks include smart contract bugs, impermanent loss, token price collapse, and rug pulls. Only invest what you can afford to lose. Stick to audited protocols (Uniswap, Aave, Compound).

Calculator Error

We Value Your Privacy