Traditionally, Annual Percentage Rate (APR) and Annual Percentage Yield (APY) are defined precisely and differentiated between each other with a defined compounding period. This makes sense for a traditional savings account, for example where a bank promises a fixed interest rate with a fixed compounding period.
But what about yield from a fluctuating holding such as a Liquidity Position (LP) on THORChain? Many folks still prefer an APR “number” to gauge the profitability of the LP.
The main difference is that the APR here is calculated based on a set historical period. One needs to specify this data period, and then extrapolate to a year. The current extrapolation calculations are done linearly.
Let’s take an example of a hypothetical LP’s position value as below:
It is apparent that different calculation periods can give wildly different APRs!
So, is the correct APR +50%, -50%, +5% or +200%? The answer is: all of them! Each of them is correct, depending on which calculation period is selected.
There could also be cases where users who entered at only slightly different times (but with substantially different LP values at the precise time of entry) will experience totally different APRs.
In the example above, although both users entered the exact same pool just ten days apart, User A experienced -80% while User B experienced +150% APR. Which is true or accurate? The answer is: both of them!
In summary, one must be aware of the calculation periods of published APRs, and also that these are all historical only, and never a promise of future returns.
Here is a tracker for THORChain LP APR based on different calculation periods: https://thorchain.net/insights/apr
Note: this article was inspired by FamiliarCow’s tweet: https://twitter.com/familiarcow/status/1660676012152090626
Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.
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