APY Calculation

Understanding ELPP Returns

ELPP measures Annual Percentage Yield (APY) based on changes in the pool’s collateralization ratio over time. This standardized metric helps users see how their investments might grow annually, assuming current trends continue.

The Formula

APY=(CollT1−CollT0CollT0×365T1−T0)×100%\text{APY} = \left( \frac{\text{Coll}_{T1} - \text{Coll}_{T0}}{\text{Coll}_{T0}} \times \frac{365}{T1 - T0} \right) \times 100\%

Where:

  • Collₜ₀: Collateralization ratio at the starting point.

  • Collₜ₁: Collateralization ratio at the ending point.

  • T₀ and T₁: Timestamp values in days.

  • T₁ - T₀: Number of days between measurements.

Example Calculation

Imagine you measure the pool’s performance over a 30-day period:

  • Starting Date T₀: January 1, 2023

  • Ending Date T₁: January 31, 2023

  • Collₜ₀: 1.000

  • Collₜ₁: 1.006

  • ΔT: T₁ - T₀ = 30 days

Plugging these values into the formula:

APY=(1.006−1.0001.000×36530)×100%\text{APY} = \left( \frac{1.006 - 1.000}{1.000} \times \frac{365}{30} \right) \times 100\%
APY=(0.006×12.17)×100%=0.073×100%=7.3%\text{APY} = (0.006 \times 12.17) \times 100\% = 0.073 \times 100\% = 7.3\%

Hence, if the same growth persists for a year, the annualized return would be about 7.3%.

Important Considerations

  • Historical Indicator: APY reflects past performance and doesn’t guarantee future returns.

  • Market Events: APY can vary significantly during periods of high volatility or extreme market conditions.

Summary

APY serves as a convenient measure of annualized returns, giving liquidity providers a clearer idea of potential growth within the ELPP.

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