# pillowVaults APY

Let's look at a typical yield farm, where they state an APY (annual percentage yield) as +100% for example. The traditional definition of APY

*. Using this terminology would indicate that the yield farm was compounding earnings for you. That is simply not the case. A more applicable terminology to use would be APR (annual percentage rate), meaning the annual rate earned through an investment. By definition this would mean that your 100% yield farm would double your original investment at the end of year 1 without reinvesting any earnings. But what about if you reinvested that entire amount the next year and the year after that?***is the real rate of return earned on an investment taking into account the effect of compounding earnings**Growth whose rate becomes ever more rapid in proportion to the growing total number or size. The simple formula for this is

*growth = (1 + r)^x**, where 'r' = return and 'x' = number of 'times'. For example, your money doubles every year if you get 100% yearly return. After 3 years you would have 8x your original investment.*growth = (1 + 100%)^3

A typical investment does not just pay out on a yearly basis, but in smaller terms (ie: daily, monthly, etc). For yield farming, returns are even paid out on a per block basis. With an average of 28,800 blocks a day and cheap transaction fees this can allow for a significant amount of exponential growth or compounding of your return. Let's look at how to break that down...

- Compound =
**P * (1+r/n)^nt**Example : 100 * (1+1/12)^(12*1) - P = principal or starting balance
- r = APR = 100%
- n = compounding periods = 12 months
- t = time = 1 year
- The simple APY calculation in excel can also be stated as =EFFECT(r, n)

Year 1 end would be 261 tokens or 161% APY versus 100% APR w/o compounding

Last modified 2yr ago