With the development of DeFi in 2020, anyone can earn interest using decentralized lending and borrowing protocols. The phrase “Yield Farming” started to become a hot keyword, bringing the profit earned from Yield Interest to a new level.
On Ethereum blockchain, everyone is familiar with the protocols that support farming with many different optimizations, but due to the weakness of the Ethereum network - the transaction fees are too high, so there is no protocol to optimize profits when using “compound farming” strategy. But what if other chains have extremely cheap transaction fees?
The other chain with extremely low transaction fees that I talk about is Binance Smart Chain, and the protocol that supports the "compound farming" strategy is Beefy.finance.
So what is Compound farming and what is special about Beefy, let's read more below.
Definition of APR and APY
APR (Annual Percentage Rate) is known as the annual rate of return.
APY (Annual Percentage Yield) is simply understood as the actual annual rate of return that is compounded.
APR, APY differences & examples
APR (Annual Percentage Rate)
For example, if you spend $10,000 on farming GUM-BNB on Pancakeswap platform, the project’s APR is 300% (unchanged), then, at the end of the year, you will receive a total of $40,000 including $10,000 (at the beginning) and an additional $30,000 (300% return on APR).
When you see the APR, it is possible to immediately calculate how much profit will be earned at the end of the year. This profit comes from staking or farming, so it only needs to be done once at the beginning to get the profit.
APY (Annual Percentage Yield)
APY is mostly used for farming projects, depending on which application.
With the APR rate, you will receive 300%/year, but with APY, the 300% rate will be divided by 365 days (each day is 0.82%). Assuming DeFi applications that allow anyone to withdraw at any interest, we will withdraw 0.82% and compound it with the initial money. Repeat this daily or monthly during the farming cycle and you will have the final total APY rate.
For example, when farming a pair of GUM — BNB on Pancake, after you farmed CAKE, you immediately sell CAKE to GUM and BNB. Then, compound GUM and BNB together with the original capital and continue to farm. You will have a much larger APY than the APR received above. That means you will receive a much larger amount of profit than $40,000.
So if you work hard by compounding the capital daily and hourly, will the profit increase significantly? Of course yes, let's come to a simple example when farming a pair of LP tokens with 500% APR, that is, you use $10,000 to farm, at the end of the year you get $60,000. But if you continuously compound the original capital to farm, the APY you get is 20,000%, which means if you put $10,000 into the farm, at the end of the year you will get $2,000,000.
2. How does Auto compound on Beefy work?
As mentioned above, on the Ethereum blockchain, everyone is familiar with the protocols that support farming with various optimizations, but due to the weakness of the Ethereum network, the transaction fees are too high, so there is no protocol to optimize the profit when using “compound farming” strategy.
However, with the low cost advantage of Binance Smart Chain, we can completely sell assets after farming and immediately add to the capital and continue to farm.
On Beefy, Auto compound will automatically handle that without the yield farmer having to handle it manually.