The Truth About High Crypto APY

metapool.near

Published in

Meta Pool

6 min readAug 30, 2022

TL;DR

We break down what APY really means for your earnings
Explaining how high APYs can be used to mislead or entice novice crypto investors
How you can avoid falling for the trap of an overinflated APY — and find real value from liquid staking

Overview

One of the biggest challenges that DeFi currently faces is its reputation. Rather than a financial system that rivals the traditional method of banking, DeFi is often portrayed as a casino-style method of getting rich quickly. The absurdly high crypto APY (annualized percentage yield) offered across L1s plays a large part in earning this reputation.

We are going to break down the truth behind these sky-high APYs, and explain exactly what these numbers mean. First we’ll explain what an APY actually is (compared with APR), and then go through how these yields often play out in reality. This should give our users an idea of the value behind the steady return offered by Meta Pool, and help them approach DeFi platforms more informed.

Annualized Percentage Yield (APY) Explained

Since the inception of financial instruments, annualized percentage yield has been the benchmark measure of an investment’s return. APY is the total amount earned on an investment, expressed as a percentage over an entire year. For example, an initial investment of $1000 that grows to $1100 over 12 months gained half of its value over the year, and thus has an APY of 10%.

Since the first staking project launched, DeFi has followed the market, using APY to advertise their rates of return. While this standardization is necessary and useful for comparing investment opportunities, predicting returns in DeFi in terms of years is often misleading. Most web3 platforms offer yield farms, staking periods, or other investment devices in periods of weeks or months due to the market volatility. If the same example investment of $1000 instead grew to $1100 in a month, it would have an APY of 214%. At 2 weeks — the preferred period of the most popular protocols on DeFi today — APY of 1,102%. This would be like weighing a 10kg dog and saying it’s 10,000 grams.

An experienced investor could see through a high APY just by looking at them, but it is important for retail DeFi users to understand the math behind these formulas. Unfortunately, short time frames are just the beginning of how APY relates to real earnings.

High Crypto APY and Liquidity Pools

Understanding the time-bound aspect of APY is important, but there are other factors that further determine what APY means for the end user. Both the type of rewards earned and TVL will affect the APY you are using. Depending on these factors, the actual earned APY for a user in these pools can dramatically decrease.

Liquidity pools and staking incentives are usually advertised at their start, when there are few participants and the added rewards are concentrated among a certain few. This means that as more capital gets added to the liquidity pool, the lower the APY will fall. Take the example of an APY of 200% advertised at the beginning of a liquidity pool with a starting TVL of $500,000. Many users hear of the great return and enter the pool, raising the TVL to $5,000,000. In this case, the APY would now be 20%, even if the pool was entered right away. Unlike the stock market, there are no discrete shares of a liquidity pool; rewards are based on the percentage of the pool you own. DeFi platforms get to decide how often their posted APY refreshes leaving users at the mercy of the market to predict their returns.

The Tokenomics Behind High Crypto APY

An additional factor that impacts the value of your rewards earned is the token your rewards are paid in. Platforms often pay staking rewards in a token other than the native token being staked.

APY is also calculated assuming the price of a token at the beginning of the period. This means that as rewards are accrued, more tokens must be minted to pay out rewards, inflating the token and lowering the real APY.

While the token itself is being accrued at a steady rate according to the APY, a single project can dramatically increase its token’s circulating supply by paying these rewards. The result is that the token decreases in value, and your rewards are ultimately worth less than they were before.

Meta Pool’s staking rewards are paid in NEAR, which is comparably a much more stable asset than an individual project’s token. This means that you are open to broader price action on the NEAR token itself, but also have almost no risk of rewards paid dictating the price of your reward asset.

In sum, a high crypto APY is not as enticing as it may seem at a glance. While degens and other highly experienced crypto traders can indeed turn a profit by moving liquidity between high APY pools, its much more likely that you will not earn the return you had hoped for. Meta Pool offers a platform that can guarantee the same staking reward as the native NEAR wallet, plus the ability to keep your assets liquid. In addition, we pay our rewards in NEAR — which means you aren’t betting on a small project’s token.

With all this in mind — Keep on Staking!

About Meta Pool & stNEAR

Meta Pool is the leading liquid staking solution for $NEAR and wNEAR token holders. With Meta Pool you earn NEAR staking rewards and maintain your liquidity to participate in DeFi protocols on NEAR and Aurora.

Users staking $NEAR and wNEAR with Meta Pool receive in exchange stNEAR (staked NEAR) tokens.

stNEAR simultaneously accrues staking rewards and unlocks users’ liquidity enabling them to participate in DeFi activities (e.g. lending, farming, borrowing) on NEAR and Aurora.

Stake $NEAR on Meta Pool (~11% APY)

Get stNEAR (Yield-bearing token)

Go DeFi on NEAR & Aurora (More APY and more rewards)

Meta Pool also solves the problems associated with Proof-of-Stake networks staking: illiquidity, immovability and accessibility. Meta Pool also aims to distribute staking in multiple validators to improve censorship-resistance of the NEAR network.

With a TVL of ~9 Million $NEAR and growing, Meta Pool has become in just a few months a cornerstone element of the NEAR ecosystem. Meta Pool is making NEAR Protocol more decentralized and therefore more secure.

In February 2022 Meta Pool has been successfully audited by BlockSec, confirming the implementation of the highest security standards.

For more information visit https://metapool.app.