DeFi APR vs APY: Calculate Net Yield After Fees and Borrowing

APR and APY answer different questions

APR is an annualized rate without reinvesting the periodic return. APY describes the effective annual growth when the assumed reinvestment takes place. If a platform displays APY, inspect the compounding assumption: automatic vault compounding, manual claiming and rewards that cannot be reinvested are different situations.

For a constant nominal APR r compounded n times per year, APY = (1 + r/n)^n − 1. A hypothetical 5% APR compounded monthly gives about 5.116% APY. This is arithmetic under fixed inputs, not a forecast of any DeFi product. Rate changes, rounding and costs can change the realized result.

A worked example without borrowing

Suppose an educational scenario starts with $10,000, assumes a constant 5% APY and runs for 90 days. Using a 365-day year, the gross growth is $10,000 × ((1.05)^(90/365) − 1), or about $121.03. If entry and exit costs total $30, the modeled net amount is about $91.03 before taxes and asset-price changes.

The holding period matters. An annual rate is not a promise that you receive that percentage during a short stay. If fixed costs are large relative to the deposit, a superficially attractive rate may produce a small or negative net result.

Add borrowing costs explicitly

If a strategy borrows capital, model the debt independently from the earning asset. For a simple estimate, interest cost = borrowed amount × borrow APR × days / 365. If the actual protocol compounds debt, calculate that growth using its convention instead.

Consider a hypothetical $5,000 debt at 8% simple APR for 90 days. The estimated interest is $98.63. That is enough to consume most of the gross growth in the previous example even before fees. These numbers are not current market rates; they illustrate why borrowing costs belong in the same worksheet as supply returns.

Net carry is the difference between the assets earned and the funding costs, including incentives and fees. Positive carry does not imply low risk. A borrower can be liquidated despite a positive expected spread if collateral falls or debt valuation rises.

Separate the base rate from reward tokens

A quoted yield may combine borrower interest, trading fees and incentive tokens. Those components have different sources and can change independently. Record whether rewards are paid in the deposited asset or another token, when they become claimable and whether realizing them requires a swap.

Do not treat an annualized short-term incentive as guaranteed for an entire year. If a campaign lasts thirty days, model that period explicitly. If rewards depend on token prices or participation, label them as assumptions rather than fixed income.

Compare like with like

Use the same principal, asset, time period and observation time when comparing strategies. Then show both a base case and a stress case. A simple stress case can lower the supply rate, raise the borrowing rate and increase exit costs. A separate scenario should consider asset-price changes; a constant-dollar model cannot represent them.

Keep stablecoin peg risk, smart contract risk and exit liquidity in a separate risk column. Converting every risk into a single invented percentage would imply a precision you do not have. The due-diligence checklist helps structure that qualitative assessment.

Use the calculator and record the assumptions

The DeFi risk and net-yield calculator provides two transparent educational models: a single-collateral health-factor estimate and a constant-rate net-yield estimate. Enter your own hypothetical values and compare how the results change. It does not connect to a wallet or retrieve live rates.

Before relying on a platform rate, inspect its documentation for rate conventions, reward assumptions and fees. For current market context, the lending APY tracker shows sourced data when available. For protocol-specific mechanics, read the Aave guide or Morpho guide.

Methodology and limits

The worked examples use a 365-day year, constant supply APY, simple borrowing APR and explicit fixed costs. They exclude taxes, liquidation penalties, slippage beyond entered costs and asset-price changes. Arithmetic is illustrative; the page makes no claim about current returns. Supporting background: Ethereum DeFi overview.