Annual Percentage Yield
Introduction
Annual Percentage Yield (APY) is a crucial metric in Euler that helps users understand their potential returns or costs when interacting with the protocol. Unlike simple interest rates, APY accounts for the effects of compound interest, providing a more accurate picture of the actual yield over time. Whether you're supplying assets to earn yield or borrowing assets to access liquidity, understanding APY is essential for making informed decisions.
Supply APY
When you supply assets to Euler, you earn yield through multiple sources. The total Supply APY you see in the interface combines three main components:
Lending APY
The primary source of yield comes from lending your assets to borrowers. This is the base return you earn for providing liquidity to the protocol. The rate varies based on market conditions and the utilization of the asset in the protocol.
Intrinsic APY
Some assets have built-in yield mechanisms. For example, when you supply wstETH, you earn staking rewards from Lido. These rewards compound with your lending interest every block, potentially boosting your overall returns. The intrinsic yield is specific to each asset and depends on its underlying mechanics.
Rewards APY
Euler may offer additional incentives in the form of reward tokens, such as rEUL. These rewards provide an extra layer of yield on top of your lending returns. Unlike intrinsic yield, reward APY doesn't compound with lending interest, but it can significantly enhance your overall returns.
Borrow APY
Borrowing on Euler comes with its own cost structure, reflected in the Borrow APY. This rate is typically higher than the Supply APY for two main reasons: the protocol maintains a utilization buffer below 100%, and a small portion of the interest goes to protocol fees.
Borrowing APY
This is the core interest rate you pay to lenders. It's calculated based on the utilization rate of the asset and can vary as market conditions change. The rate is designed to incentivize optimal utilization of the protocol's liquidity.
Intrinsic APY
When you borrow certain assets, you may need to account for their intrinsic yield. For example, borrowing wstETH means you'll need to pay back both the borrowing interest and the staking rewards that accrue to the asset. This compounds with your borrowing costs every block.
Rewards APY
In some cases, borrowing can be profitable thanks to reward incentives. The protocol may offer reward tokens like rEUL to borrowers, which can offset or even exceed the borrowing costs. These rewards don't compound with the borrowing interest but can make borrowing attractive in certain market conditions.
Understanding APY Dynamics
The relationship between Supply APY and Borrow APY creates an interesting dynamic in the protocol. When utilization is low, Supply APY tends to be lower, and Borrow APY is lower to encourage borrowing. As utilization increases, Supply APY rises to attract more suppliers, while Borrow APY increases to manage risk.
This balance ensures that:
- Lenders earn competitive returns for providing liquidity
- Borrowers have access to capital at reasonable rates
- The protocol maintains sufficient liquidity for all users
- Risk is managed through appropriate rate adjustments
Best Practices
When evaluating APY opportunities in Euler:
- Consider all components of the APY, not just the headline rate
- Understand how intrinsic yield affects your position
- Factor in reward tokens when calculating total returns
- Monitor rate changes as market conditions evolve
- Consider the impact of compound interest on your returns
- Be aware that APY rates are dynamic and can change