Yield Farming APY Calculator
Estimate yield farming returns accounting for compounding frequency, fees, and impermanent loss.
Reviewed for accuracy by Sahil, Senior Finance & Tax Editor
Yield Farming APY Calculator
Calculator
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Formula: APY = (1 + Daily Rate x 365/n)^n - 1
Worked example — Net Profit: $3,385 | Net ROI: 33.85% | APY: 44.03%
Formula
APY = (1 + Daily Rate x 365/n)^n - 1
Where n is the number of compounding periods per year. The calculator applies this APY to your net deposit (after deposit fees), subtracts total gas costs for each compounding event, and reduces the final amount by the estimated impermanent loss percentage.
Worked Examples
Example 1: Daily Compounding DeFi Farm
Problem:You deposit $10,000 into a yield farm with 0.1% daily rate, daily compounding, $2 harvest gas cost, no deposit fee, and 2% estimated impermanent loss over 365 days.
Solution:APR = 0.1% x 365 = 36.5% APY = (1 + 0.001)^365 - 1 = 44.03% Gross value after 365 days = $10,000 x (1.001)^365 = $14,403 Gas costs = $2 x 365 = $730 Impermanent loss = $14,403 x 2% = $288 Net value = $14,403 - $730 - $288 = $13,385 Net profit = $13,385 - $10,000 = $3,385
Result:Net Profit: $3,385 | Net ROI: 33.85% | APY: 44.03%
Example 2: Weekly Compounding with Deposit Fee
Problem:You deposit $5,000 into a pool with 0.15% daily rate, weekly compounding (52x/year), $5 harvest gas, 0.5% deposit fee, and 3% impermanent loss over 180 days.
Solution:Net deposit after fee = $5,000 x 0.995 = $4,975 Rate per compound = 0.15% x 7 = 1.05% per week Compounds in 180 days = floor(52/365 x 180) = 25 Gross value = $4,975 x (1.0105)^25 = $6,468 Gas costs = $5 x 25 = $125 IL = $6,468 x 3% = $194 Net value = $6,468 - $125 - $194 = $6,149 Net profit = $6,149 - $5,000 = $1,149
Result:Net Profit: $1,149 | Net ROI: 22.98% | APR: 54.75%
Frequently Asked Questions
What is the difference between APR and APY in yield farming?
APR (Annual Percentage Rate) represents the simple interest rate earned over a year without accounting for compounding, while APY (Annual Percentage Yield) includes the effect of compound interest. In yield farming, the distinction is critical because most DeFi protocols display APR, but your actual returns depend on how frequently you compound your rewards. For example, a 100% APR compounded daily produces an APY of approximately 171.5%, nearly doubling the simple rate. The formula for converting APR to APY is: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. Always compare APY figures rather than APR when evaluating different yield farming opportunities.
What is impermanent loss in yield farming?
Impermanent loss occurs when you provide liquidity to an automated market maker (AMM) pool and the relative prices of the paired tokens change compared to when you deposited them. The loss is called impermanent because it only becomes realized (permanent) when you withdraw your liquidity. If the token prices return to their original ratio, the loss disappears. The magnitude of impermanent loss depends on the price divergence: a 25% price change causes approximately 0.6% IL, a 50% change causes 2% IL, a 100% change (price doubles) causes about 5.7% IL, and a 500% change causes roughly 25% IL. This is why many yield farmers prefer stablecoin pairs or correlated asset pairs, which experience minimal price divergence and therefore minimal impermanent loss.
How does compounding frequency affect yield farming returns?
Compounding frequency has a dramatic impact on yield farming returns, especially at higher APR levels. With a 100% APR and annual compounding, you earn exactly 100% per year. With daily compounding (365 times per year), the same APR yields approximately 171.5% APY. With hourly compounding, it reaches about 171.8% APY. The benefit of more frequent compounding diminishes as frequency increases, with the biggest jump occurring between annual and monthly compounding. However, each compounding event in DeFi requires a blockchain transaction that costs gas fees, so there is an optimal compounding frequency that maximizes returns after gas costs. For small deposits, compounding weekly or monthly is often more efficient, while large deposits benefit from daily or even more frequent compounding.
How do gas costs impact yield farming profitability?
Gas costs can severely erode or completely eliminate yield farming profits, especially on Ethereum mainnet for smaller deposits. Each harvest and compound operation requires a blockchain transaction costing anywhere from 2 to 50 dollars or more depending on network congestion. If you compound daily at 10 dollars per transaction, that is 3,650 dollars per year in gas alone. For a 10,000 dollar deposit earning 50% APY, your gross earnings would be 5,000 dollars, meaning gas costs consume 73% of your returns. The optimal strategy is to calculate the minimum deposit size and maximum gas cost at which compounding remains profitable. Many farmers use auto-compounding vaults like Beefy Finance or Yearn that batch user deposits together, spreading gas costs across many users and making frequent compounding viable for smaller amounts.
What are the main risks of yield farming?
Yield farming carries several significant risks beyond impermanent loss. Smart contract risk is the most fundamental danger, as bugs or vulnerabilities in the protocol code can lead to total loss of deposited funds through hacks or exploits, which have resulted in billions in losses across DeFi history. Rug pulls occur when developers intentionally drain liquidity pools or abandon projects after collecting deposits. Token price depreciation can eliminate farming rewards if the reward token loses value faster than you earn it. Protocol governance risks include sudden changes to emission rates or fee structures. Systemic risks from composability mean that a failure in one protocol can cascade to others that depend on it. Finally, regulatory risk looms as governments worldwide consider stricter crypto regulations that could affect DeFi protocols.
What is a realistic daily yield rate for sustainable farming?
Sustainable daily yield rates in yield farming vary widely depending on the asset pair, chain, and protocol, but realistic ranges are much lower than the eye-catching numbers often advertised. For major asset pairs like ETH-USDC on established protocols, sustainable daily rates typically range from 0.01% to 0.05% (3.65% to 18.25% APR). Stablecoin pairs like USDC-USDT may offer 0.005% to 0.03% daily (1.8% to 11% APR). Higher rates of 0.1% to 0.5% daily can exist but usually involve newer or riskier protocols, volatile token pairs, or unsustainable emission schedules. Any farm advertising rates above 1% daily (365% APR) should be approached with extreme caution, as these rates are almost always unsustainable and may indicate a Ponzi-like structure or imminent token value collapse.
How do auto-compounding vaults work?
Auto-compounding vaults like Beefy Finance, Yearn Finance, and Harvest Finance automate the process of harvesting yield farming rewards and reinvesting them back into the farming position. When you deposit into a vault, your funds are pooled with other users and deployed into the underlying yield farming strategy. A bot periodically harvests the earned reward tokens, swaps them for the deposited assets, and redeposits them to compound your returns. The vault charges a small performance fee (typically 2-5% of profits) to cover gas costs and generate protocol revenue. The key advantage is that gas costs are shared among all vault depositors, making frequent compounding cost-effective even for small positions. Vaults typically compound multiple times per day, achieving near-optimal APY from the underlying APR.
How should I evaluate a yield farming opportunity before investing?
Before investing in a yield farm, conduct thorough due diligence across multiple dimensions. First, verify the protocol has been audited by reputable security firms like Trail of Bits, OpenZeppelin, or Certik, and check whether any audit findings were addressed. Second, examine the total value locked (TVL) and its trend, as declining TVL often signals decreasing confidence. Third, analyze the reward token economics including total supply, emission schedule, and whether there are adequate demand sinks to support the token price. Fourth, assess the smart contract code complexity and whether it uses upgradeable proxies that could be modified by developers. Fifth, check the team reputation and whether they are publicly known or anonymous. Finally, calculate your expected returns after all fees, gas costs, and potential impermanent loss to determine if the risk-adjusted return justifies the capital at risk.
What is the optimal deposit size for yield farming?
The optimal deposit size depends primarily on gas costs relative to expected earnings. A general rule is that your daily farming earnings should be at least 10 times your daily gas costs to make the strategy worthwhile. On Ethereum mainnet where a harvest transaction might cost 10 to 30 dollars, a minimum deposit of 5,000 to 10,000 dollars is typically needed for farming to be profitable with daily compounding. On cheaper chains like Polygon, Arbitrum, or Solana where transactions cost pennies, even 100 to 500 dollar deposits can be profitable. Calculate your break-even point by dividing total expected gas costs over your holding period by the expected yield rate. Also consider that very large deposits in smaller pools can significantly impact the reward distribution, reducing the effective APY through dilution of the reward pool.
How do deposit fees affect yield farming returns?
Deposit fees, sometimes called entry fees, are one-time charges applied when you first deposit funds into a yield farming vault or pool. Common deposit fees range from 0% to 0.1% on major platforms, though some smaller protocols charge up to 4% or more. A deposit fee creates an immediate loss that your farming rewards must overcome before you start earning actual profit. For example, a 1% deposit fee on a 10,000 dollar deposit means you start with a 100 dollar deficit. If the farm yields 0.1% daily (roughly 36.5% APR), it takes about 10 days just to break even on the deposit fee alone. Higher deposit fees require longer holding periods to be profitable, so they effectively lock you into the farm. Always factor deposit fees into your return calculations and compare the net APY after fees across different platforms.
References
Reviewed for accuracy by Sahil, Senior Finance & Tax Editor · Editorial policy
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