By Team SalaryCalculate · 9/11/2025
Yield farming promises attractive returns, but the advertised APY often doesn't match reality. Between gas fees, impermanent loss, and changing rewards, your actual returns can be dramatically different from what you expect.
Understanding how to calculate yield farming returns is crucial for making informed decisions. This guide breaks down the math behind yield farming and shows you how to determine your true net returns.
APY vs APR: The Foundation
Annual Percentage Rate (APR) is the simple interest rate without compounding. Annual Percentage Yield (APY) includes the effect of compounding. In yield farming, rewards are often compounded automatically, making APY the more relevant metric.
The formula for APY is: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. For daily compounding, n = 365. This means a 10% APR becomes 10.52% APY with daily compounding.
Here's how APR converts to APY with different compounding frequencies:
| APR | Daily Compounding | Weekly Compounding | Monthly Compounding | No Compounding |
|---|---|---|---|---|
| 5% | 5.13% | 5.12% | 5.12% | 5.00% |
| 10% | 10.52% | 10.47% | 10.47% | 10.00% |
| 20% | 22.13% | 21.64% | 21.64% | 20.00% |
| 50% | 64.81% | 60.10% | 60.10% | 50.00% |
| 100% | 171.46% | 142.86% | 142.86% | 100.00% |
Components of Yield Farming Returns
Yield farming returns come from multiple sources. Understanding each component helps you calculate your total returns accurately. The main sources are trading fees, liquidity mining rewards, and governance token distributions.
Trading fees are the most stable component. They're generated from every trade in the pool and distributed proportionally to liquidity providers. These fees typically range from 0.05% to 1% per trade, depending on the protocol.
Liquidity mining rewards are additional tokens distributed to incentivize liquidity provision. These rewards are often temporary and can change based on governance decisions or protocol updates.
Calculating Trading Fee Returns
Trading fee returns depend on the pool's trading volume and your share of the liquidity. The formula is: Daily Fee Return = (Daily Trading Volume × Fee Rate) / Total Liquidity × Your Liquidity Share.
For example, if a pool has $1 million in liquidity, $100,000 daily volume, and a 0.3% fee rate, the daily fees are $300. If you provide $10,000 (1% of the pool), you earn $3 per day, or 10.95% annually.
However, trading volume fluctuates significantly. A pool might have $100,000 volume one day and $10,000 the next. This volatility makes fee-based returns unpredictable.
Accounting for Impermanent Loss
Impermanent loss is the difference between holding tokens directly versus providing liquidity. It occurs when the price ratio of tokens in the pool changes. This loss can significantly impact your net returns.
The formula for impermanent loss is: IL = 2 × √(price_ratio) / (1 + price_ratio) - 1. For a 2x price change, impermanent loss is approximately 5.7%. For a 4x change, it's about 20%.
To calculate net returns, subtract impermanent loss from your yield farming returns. If you earn 20% APY but experience 10% impermanent loss, your net return is only 10%. Learn more about impermanent loss to better understand this risk.
Gas Fees: The Hidden Cost
Gas fees can eat into your returns, especially for small positions. Every transaction - depositing, claiming rewards, withdrawing - costs gas. On Ethereum, these fees can range from $10 to $200+ depending on network congestion.
For a $1,000 position earning 20% APY ($200 annually), gas fees of $50 for entry and exit reduce your returns to 15%. For smaller positions, gas fees can make yield farming unprofitable.
Some strategies minimize gas costs by using auto-compounding protocols or staying in pools longer. Others use Layer 2 solutions or alternative chains with lower fees.
Using Yield Farming Calculators
Manual calculations can be complex and error-prone. Use our crypto yield farming calculator to estimate your returns accurately. These tools account for fees, impermanent loss, and gas costs to give you realistic projections.
For more comprehensive DeFi calculations, including lending and borrowing returns, use our crypto DeFi calculator. This tool helps you compare different DeFi strategies and optimize your returns.
Real-World Example
Let's calculate the returns for providing liquidity to an ETH/USDC pool. You deposit $10,000 (5 ETH at $2,000 each) and $10,000 USDC. The pool offers 15% APY from trading fees and 25% APY from liquidity mining rewards.
After 6 months, ETH price doubles to $4,000. Your position is now worth $30,000 (3.54 ETH + $14,142 USDC). You've earned $2,000 in fees and $2,500 in rewards, totaling $4,500.
However, if you had simply held 5 ETH and $10,000 USDC, you'd have $30,000. Your impermanent loss is $0, but you missed out on the $4,500 in yield farming rewards. Your net return is 22.5% (45% annualized).
But if ETH had dropped to $1,000, your position would be worth $15,000, and your impermanent loss would be $5,000. Even with $4,500 in rewards, you'd have a net loss of $500.
Risk-Adjusted Returns
High APY doesn't always mean high risk-adjusted returns. A pool with 100% APY but 50% impermanent loss risk might be worse than a pool with 20% APY and 5% risk.
Consider the Sharpe ratio: (Return - Risk-free Rate) / Volatility. This metric helps compare strategies with different risk profiles. A higher Sharpe ratio indicates better risk-adjusted returns.
For yield farming, the risk-free rate might be staking returns (5-10%), and volatility includes both price movements and reward changes. Calculate this ratio to compare different strategies objectively.
Monitoring and Optimization
Yield farming returns change constantly. Rewards decrease as more liquidity enters pools, and impermanent loss increases with volatility. Regular monitoring and rebalancing are essential for maximizing returns.
Set up alerts for significant changes in APY, pool composition, or token prices. Consider automated tools that rebalance your positions based on predefined criteria.
Track your actual returns versus projections. This helps you refine your strategy and identify the most profitable opportunities. Keep detailed records of all transactions and fees.
Common Mistakes
Ignoring impermanent loss is the biggest mistake. Many farmers focus only on APY and forget that price movements can wipe out their gains. Always calculate net returns after accounting for impermanent loss.
Underestimating gas costs is another common error. For small positions, gas fees can exceed your returns. Calculate the minimum position size needed to make yield farming profitable.
Failing to diversify across multiple pools increases risk. Don't put all your funds in one high-yield pool. Spread your risk across different protocols and token pairs.
Not accounting for reward token volatility is another oversight. Governance tokens often have high volatility, and their value can drop significantly before you can sell them.
Tax Considerations
Yield farming creates multiple taxable events. Each reward claim, token swap, and position rebalancing can trigger capital gains or losses. The complexity makes tax planning challenging.
Keep detailed records of all transactions, including timestamps, amounts, and USD values. Consider using specialized tax software or consulting with a crypto tax professional.
Some strategies can help minimize tax liability, such as holding positions for over a year to qualify for long-term capital gains rates, or using tax-loss harvesting to offset gains.
The Bottom Line
Calculating yield farming returns requires considering multiple factors: APY, impermanent loss, gas fees, and tax implications. The advertised APY is rarely what you actually earn.
Focus on net returns after all costs and risks. Use calculators to estimate realistic returns, monitor your positions regularly, and be prepared to adjust your strategy as conditions change.
Remember that yield farming is not passive income. It requires active management, risk assessment, and continuous optimization. Only farm with funds you can afford to lose and with a clear understanding of the risks involved.
