Understanding Active APY
To get the best yield, make sure your tokens are active!
Introduction
Active APY (Annual Percentage Yield) is a crucial metric for investors and traders in various financial markets. It provides a dynamic and focused understanding of the potential returns from active trading spots or bins over a specific period. This document aims to explain the concept of Active APY, how it is calculated and its significance in investment decisions.
What is Active APY?
Active APY is an annualised metric that measures the yield or return on investment, specifically focusing on the most active trading ranges within the last seven days. It differs from traditional APY by concentrating on the parts of the portfolio or fund that are actively generating fees, providing a more current snapshot of investment performance.
Understanding the Limitations of Active APY in Liquidity Provision
When providing liquidity in Shape Liquidity pools, it's important to understand that Active APY represents only a part of the overall financial picture. Active APY calculates the yield from active trading within the pool, reflecting the fees you earn. However, this metric does not account for impermanent loss, which occurs when the price of tokens in the pool changes significantly. If the token price moves drastically, the fees indicated by Active APY may not fully offset the impermanent loss experienced. Conversely, if the token price returns to its initial level at the time of your deposit, the impermanent loss is effectively nullified, leaving you with the earnings from the fees. Therefore, while Active APY is a valuable tool for assessing returns from active trading, it should be considered in conjunction with potential impermanent loss to get a complete understanding of the profitability of liquidity provision.
Note: Active APY reflects trading fees earned but does not account for impermanent loss. Always consider potential price fluctuations of tokens in the pool alongside Active APY for a complete financial assessment.
Calculation of Active APY
The calculation of Active APY involves two key components:
ACTIVE_FEES_7D: This represents the fees earned from active trading bins within the last 7 days.
ACTIVE_CAPITAL_7D: This denotes the total capital invested in these active bins during the same period.
The formula for Active APY is as follows:
This formula takes the ratio of the active fees to the active capital for a week, annualises it by raising it to the power of 52 (weeks in a year) and then subtracts 1 to express it as a yield.
Importance of Active APY
Active APY is especially useful for:
Real-time Performance Analysis: It offers a more immediate view of how actively managed segments of a portfolio are performing.
Investment Decision Making: Investors can use this metric to assess the effectiveness of active trading strategies.
Limitations
While Active APY is a valuable tool, it's important to remember:
Market Variability: Returns can fluctuate and past performance is not always indicative of future results.
Specific Focus: It only considers returns from active spots, not the entire investment.
Conclusion
Active APY provides a nuanced and timely perspective on investment returns, particularly useful in active trading scenarios. By focusing on the most productive parts of an investment over a recent period, it helps investors and traders gauge the effectiveness of their strategies in near real-time.
If your liquidity is far away from the active trading area then you are unlikely to be enjoying returns similar to the Active APY
Key Insight: If the token price returns to its initial value at your liquidity adding time, impermanent loss is nullified, effectively realising the earnings indicated by Active APY from trading fees.
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