One can never seem to exhaust the benefits associated with cryptocurrencies and blockchains. One of the numerous benefits is passive income earning.
DeFi has brought to light different ways through which one can earn passive income, making sure that they are more efficient, secured, and better rewarding than what traditional finances offer. Knowing how PancakeSwap APR is calculated is also efficient in determining your expected returns.
Key Takeaways
•APR offered by DeFi protocols is higher than the interest offered by traditional banking protocols.
•Loans provided can always be withdrawn since smart contracts govern such processes to eliminate borrower payback risks.
•Earn without the risk of losing your funds in volatile crypto trading.
•You can earn a part of all the fees generated on a DEX by investing.
•Up to 100%, APR can be gotten from yield farming.
Decentralised Finance puts everyone on the playing field, so long as you have internet and digital assets, to be able to generate passive income with your assets instead of leaving it idle.
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SEE ALSO: How to Create a PancakeSwap Token
Some of the ways one can earn passive income on their assets are by staking, yield farming, providing liquidity and other options offered by Decentralised Exchanges.
DEX provides the platform to link asset owners to asset borrowers within a secured and fair space without the need for documentation.
Providers of the much-needed capital and liquidity earn APR on their invested assets. Something attractive and calculated in a very fair manner, a part of the fees proportional to your pool share whenever a swap is made.
What is PancakeSwap?
PancakeSwap is an automated market maker and DeFi platform on Binance Smart Chain where users can exchange crypto tokens, provide liquidity and earn fees.
What is Staking?
Staking is the act of locking away crypto assets through smart contracts as a way of securing the Blockchain network. For simplicity, see it as a savings account on a blockchain where you get interest from staked assets over time.
Assets that are locked through staking are made accessible to borrowers as loans and interest is earned on them. The interest constitutes the APR which is paid to a user or staker according to the number of assets staked.
Interest accrued from staked assets is paid in form of the token staked or another token on the platform where staking is done. In this case, PancakeSwap has CAKE as the native token.
Staking is done to secure the blockchain network in question and make it safe and harder to hack.
SEE ALSO: How to Fix Insufficient Output Amount Error On Pancakeswap
What is Yield Farming?
Yield farming is a crypto earning method of getting extra income by providing liquidity. DeFi platforms run on funds, so if you provide some of these funds, you earn a share of the fees they charge.
Very similar to staking, but it is exclusive to locking only LP tokens – earned from staking. You earn CAKE on PancakeSwap when you stake LP tokens.
What is APR?
APR, which is the acronym for Annual Percentage Rate, is the extra reward or value gotten by crypto investors when they make their cryptocurrencies available to be loaned out.
APR might sound like what you know as interest rates but it is more than that. An APR is the interest rate plus other fees that borrowers or loan takers must pay for the loan collected.
The interest rate is what a loan taker will pay, excluding any additional charges or fees, for money borrowed. While APR is what the loan taker will pay, including all the fees, for using money borrowed.
Types of APR
Exchanges, just like traditional financial institutions, majorly offer two types of loans – Fixed loans and Flexible loans. Hence there are fixed and variable APR types.
Fixed APR stays the same and is not affected by any kind of fluctuation. Fixed APR is applied on staked cryptocurrencies that are locked away and cannot be withdrawn at any time, not until the end of the staking period.
Variable APR fluctuates according to fluctuations in interest rates caused by changes in the market. A decreasing market trend will mean a lower interest rate resulting in a cheaper loan with a low APR. But whether or not it is beneficial to a loan provider or a loan taker depends on the future interest rate trend and the interest rate at present or the time of loan collection.
Calculating APR on PancakeSwap
LP reward is calculated as thus
First of all, look out for the total liquidity and the trading volume, the 24-hour trading volume is what you will find. For this let’s assume:
Liquidity: $370.2M
Volume 24H: $80.55M
Since APR is a yearly fee, the trading volume to be used in calculation has to be the trading volume for a year. The estimated fees for a year will be the trading volume fee over 24 hours multiplied by 365 days.
Considering that fees on PancakeSwap are 0.17%, and the 24-hour trading volume we are looking at is $80,550,000.
24-hour trading volume fees will be
$80,550,000 * 0.17% = $136,935
The estimated fee in a year based on the current 24H trading volume will then be
$136,935 * 365 = $49,981,275
Now to get the APR, the yearly fee is divided by the total liquidity of the pool
$49,981,275 ÷ $370.2M = 0.135
APR is a calculated percentage, so multiply by 100. So we have
0.135 * 100 = 13.5% APR
Frequently Asked Questions (FAQS)
Q1. What is the fee on PancakeSwap?
Token swaps done on PancakeSwap come with a 0.25% exchange fee of which 0.17% amounts to the earnings rewarded to providers of liquidity. 0.05% is used to buy CAKE and burn while the remaining 0.03% ends up in PancakeSwap Treasury.
Q2. How does PancakeSwap farm work?
To participate in Yield Farming on PancakeSwap you need LP tokens to be able to enter a farm. Each farm has a unique LP token and only accepts that exact token. For example, the CAKE-BNB token for the CAKE – BNB farm.
To earn LP tokens, you need to provide liquidity for the LP token trading pair in question. By so doing, you earn the LP tokens as rewards
Q3. What does PancakeSwap multiplier mean?
The multiplier on PancakeSwap is the number of rewards allocated per block to a yield farm. It is simply a number that multiplies the farm rewards. So for each block on the farm, a multiplier will give you an idea of the amount of CAKE that would be rewarded for it. A 40X multiplier, therefore, means, you are getting 40 times of whatever is the rewards per block on that farm.
Q4. Is yield farming safe?
Everything comes at a risk and Yield farming is not left out. We are talking of a permission-less environment governed by smart contracts. Yield farming is very safe but there is a possibility that some DEX might have poorly coded smart contracts and become targeted by hackers, leading to loss of your funds. So do proper research before investing anywhere.
Final Thoughts
Crypto is highly volatile, changing in value now and then. The interest rate charged on loans also increases and decreases as the value of the asset varies. As a loan taker, If a potential increase in interest rates is foreseen, getting a loan that has a fixed APR attached to it at a time of low interest would be in your best interest. Any increase in interest rates will not affect the current APR.
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