Welcome back to another episode of Lending, Simplified!
This is our educational series on the basics of lending, designed to get you ready for lending on Pike
Today, we'll learn about APY and how to balance your rewards and fees.
Let's dive in 🧵👇
1/ When understanding APY, you can think of it as the rate of return or growth of an investment, including the effects of compound interest.
APY can have positive or negative returns depending on the scenario. Let's investigate what APY looks like on Pike
2/ A borrower will take a loan, and on top of the money they are loaned, they will be charged an interest fee for the balance until it is paid back.
Pike displays this interest cost as APY, and for the purposes of this lesson, it can be referred to as "Negative APY"
3/ And when you supply your collateral into a lending market, you will be paid a reward for offering that collateral to borrowers.
For now, we'll call this "Positive APY"
4/ So far, this is pretty simple: supplying money will earn you rewards, and borrowing money means you pay fees.
But Pike doesn't display APY in positive or negative numbers, so how can you prepare?
5/ For this, you'll need to understand what side of the market you're on.
If you're supplying collateral, and the APY is 0.75%, that's the Positive APY.
If you're borrowing against your collateral, and the APY is 1%, this would be considered the Negative APY
6/ Let's imagine your rates on Pike follow this model. If you supplied collateral for 0.75% and took out a loan at 1% APY, you would likely be paying more in interest than you're receiving in rewards.
7/ But the size of your loan matters, and taking a very small loan might be covered by the fees your supplied collateral is earning.
Here's an example:
8/ If you supply $100, and you earn 0.75% APY in rewards, your yearly return would be 75 cents.
But the largest loan you could take while still breaking even would be $75
At 1% APY, this loan would accrue 75 cents in fees for the year, and you would experience no debt.
9/ Fortunately in Pike, we handle a lot of the math for you! We display your Net APY, which is your Supply APY - Borrow APY
This gives you an at-a-glance view of your profitability, and can help you make better financial decisions.
