How to Calculate Your Real Yield and APY

Detailed Instructions

Begin by collecting the precise raw data points from your investment dashboard or smart contract. You cannot calculate accurate yields without the correct foundational numbers. This includes the initial principal, any fees incurred, and the current value of your holdings.

• Sub-step 1: Identify Principal Amount: Log into your platform (e.g., Aave, Lido, or a centralized exchange) and locate your initial deposit amount. For example, you might have deposited 10 ETH.
• Sub-step 2: Locate Earned Rewards: Find the total rewards or interest earned over a specific period. This could be staking rewards, liquidity provider fees, or lending interest. Note if these are displayed in a different token (e.g., stETH or a governance token).
• Sub-step 3: Record All Fees: Check transaction histories for network gas fees, protocol withdrawal fees, or performance fees. For instance, a Uniswap V3 LP position might have a 0.3% fee on swaps.
• Sub-step 4: Note the Time Period: Precisely record the period over which these earnings accrued (e.g., 30 days, 90 days).

Tip: Use blockchain explorers like Etherscan for DeFi investments to verify on-chain data. For the example, assume: Principal = 10 ETH, Rewards Earned = 0.5 ETH, Fees Paid = 0.02 ETH, over 90 days.

Detailed Instructions

Nominal Yield is your basic return, calculated as (Earnings / Principal) over a period. It does not account for compounding or inflation. This gives you the raw performance figure.

• Sub-step 1: Compute Net Earnings: Subtract any fees from your gross rewards. Using our example: Net Earnings = 0.5 ETH (Rewards) - 0.02 ETH (Fees) = 0.48 ETH.
• Sub-step 2: Apply the Nominal Yield Formula: Divide the net earnings by the principal and multiply by 100 to get a percentage. Formula: Nominal Yield (%) = (Net Earnings / Principal) * 100.
• Sub-step 3: Execute the Calculation: For our 90-day period: (0.48 ETH / 10 ETH) * 100 = 4.8%.
• Sub-step 4: Annualize if Necessary: To compare with APY, convert this periodic yield to an annual rate. For a 90-day period: Annualized Nominal Yield = (1 + 0.048)^(365/90) - 1. Calculate this as: (1.048)^(4.0556) - 1 ≈ 0.207 or 20.7%.

Tip: This annualized figure is not the APY; it's a simple projection ignoring compounding within the year. Use a calculator for the exponent.

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// Example calculation in JavaScript
let principal = 10;
let netEarnings = 0.48;
let periodDays = 90;
let nominalYieldPeriod = (netEarnings / principal); // 0.048
let annualizedNominal = Math.pow(1 + nominalYieldPeriod, 365/periodDays) - 1; // ~0.207

Detailed Instructions

Annual Percentage Yield (APY) reflects the real rate of return, factoring in compounding frequency—how often earnings are reinvested to generate their own earnings. This is crucial for protocols that compound rewards automatically, like many liquid staking derivatives.

• Sub-step 1: Determine Compounding Periods: Identify how often rewards are compounded (e.g., daily, weekly, per block). For example, Lido stakes ETH and compounds stETH rewards continuously.
• Sub-step 2: Use the APY Formula: The standard formula is APY = (1 + (r/n))^(n) - 1, where r is the annual nominal interest rate (as a decimal) and n is the number of compounding periods per year. If you have a periodic yield instead, adapt accordingly.
• Sub-step 3: Apply with Example Data: Assume our 4.8% yield over 90 days came from a protocol that compounds rewards daily. First, find the daily rate: daily rate = (1 + 0.048)^(1/90) - 1 ≈ 0.000522. Then, APY = (1 + 0.000522)^365 - 1 ≈ 0.211 or 21.1%.
• Sub-step 4: Verify with Known Tools: Cross-check using an online APY calculator or a protocol's own dashboard, which might display this directly.

Tip: For simplicity, many DeFi interfaces show a projected APY. Always verify if it's APY or APR (Annual Percentage Rate, which doesn't compound).

codeCopy
// Calculating APY from a periodic yield with daily compounding
let periodicYield = 0.048; // Over 90 days
let daysInPeriod = 90;
let dailyRate = Math.pow(1 + periodicYield, 1/daysInPeriod) - 1;
let APY = Math.pow(1 + dailyRate, 365) - 1; // ~0.211
console.log(`APY: ${(APY*100).toFixed(2)}%`);

Detailed Instructions

Real Yield is the most critical metric, representing your return after accounting for inflation, which erodes purchasing power. It tells you if your investment is truly growing wealth. You'll need a reliable inflation rate, such as the Consumer Price Index (CPI) for traditional finance or a crypto-native inflation metric.

• Sub-step 1: Obtain the Inflation Rate: Find the annual inflation rate for your currency. For USD, use the U.S. Bureau of Labor Statistics CPI data (e.g., 3.2%). In crypto, consider the network's token issuance rate or a general defi index.
• Sub-step 2: Use the Real Yield Formula: The approximate calculation is Real Yield ≈ Nominal Yield (or APY) - Inflation Rate. For a more precise result, use the Fisher equation: Real Yield = (1 + Nominal Rate) / (1 + Inflation Rate) - 1.
• Sub-step 3: Perform the Calculation: Using our annualized nominal yield of 20.7% and a CPI of 3.2%: Approximate Real Yield = 20.7% - 3.2% = 17.5%. Using the Fisher equation: (1 + 0.207) / (1 + 0.032) - 1 ≈ 0.169 or 16.9%.
• Sub-step 4: Interpret the Result: A positive real yield (like ~17%) means your investment outpaces inflation. A negative real yield means you are losing purchasing power despite nominal gains.

Tip: For crypto investments, also consider gas fee inflation (cost of transacting) and token-specific inflation (e.g., ETH issuance post-merge) for a more accurate picture.

codeCopy
// Calculating Real Yield using the Fisher equation
let nominalAPY = 0.207; // From previous step
let inflationRate = 0.032; // 3.2%
let realYield = (1 + nominalAPY) / (1 + inflationRate) - 1; // ~0.169
console.log(`Real Yield: ${(realYield*100).toFixed(2)}%`);