FOLLOW THE MECHANISM
- 1Specify
Choose principal, annual rate, period and unit.
- 2Reinvest
Add net rewards at the stated frequency.
- 3Revalue
Separate token growth from price changes and losses.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
APR and the unit of account
In this atlas, APR means a simple annualized rate before reinvesting rewards. At a constant 10% nominal APR, 100 units earn 10 units over one year under the simple-interest assumption. A token APR is denominated in token units unless stated otherwise. It says nothing by itself about the ending dollar value. Real platforms use rate conventions differently, so a displayed label must be checked against its definition, time basis, included fees and reward assets.
Compounding adds a timing assumption
APY describes a one-year effective growth rate with a stated reinvestment schedule. For a constant nominal annual rate r and n equal compounding periods, APY = (1 + r/n)^n − 1. Each period’s reward is assumed to join the earning balance immediately. At 10% APR compounded monthly, the calculation gives about 10.47% APY. This is arithmetic, not a promise that a protocol permits monthly reinvestment or that the rate will remain unchanged.
Costs can outweigh more frequent reinvestment
Compounding is not always automatic. Claiming, swapping reward tokens and depositing again may incur network fees and price impact. An illustrative one-unit reward that costs two units to reinvest reduces wealth rather than adding useful compounding. A vault may automate those actions and spread some costs across depositors, while charging management or performance fees. The appropriate calculation therefore uses net reinvestable rewards and the actual timing. Zero starting capital produces zero growth in this model because no extra contributions are assumed.
Yield is different from total return
Suppose 100 tokens become 110 after rewards, while the token price falls from 2 to 1.50 reference units. The ending value is 165 versus a starting value of 200: total return is −17.5% before other costs. The nominal token yield was still 10%. Slashing, bad debt, depegging or a contract failure can create additional losses that an interest formula does not model. The compounding demonstration deliberately holds the rate and unit value fixed, making its limits visible instead of presenting a live forecast.
MAKE IT CONCRETE
Simple versus compounded
For 1,000 illustrative units at 12% for a year, simple interest ends at 1,120. Monthly compounding at 1% per month ends at approximately 1,126.83, assuming no costs or rate changes.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
- APY requires explicit reinvestment assumptions.
- Reward units and fiat return can move in opposite directions.
KEEP EXPLORING