Staking APY is only half the story. What is the effective APY?

Lots of folks are lured in by high staking APY thinking that when they see 10% or 500% APY that they will be receiving that much appreciation of their dollars, but you also need to account for the inflation rate as well. That APY is how many more tokens you will get, not dollars.

For example, you can get 12% APY by staking DOT. Awesome! I'll buy $100 worth, stake it and next year have $112 worth if the price stays the same right? Well it's not as simple as that. The inflation rate is 10% for DOT, so your effective APY is 2%. If you bought $100 worth of DOT, did not stake it, and the market cap stayed the same, then you would have $90 worth of DOT, because of that 10% inflation. If you did stake, and the market cap stayed the same, then you would have 12% more DOT tokens (so you may go from 1 DOT to 1.12 DOT), but $102 worth of DOT because the effective APY is 2% (12% APY - 10% inflation = 2% effective APY).

But what if the price stays the same! I hear you say. Well you have to take into account the market cap.

Market cap = token price * token supply

So if 1 DOT = $100, and there are 10 DOT total in existence then the market cap is $1000.

$1000 = $100 * 10

If they double the supply of DOT today and now there are 20 in existence, the market would determine that each DOT is now worth half as much as it was yesterday. Just like if a company did a stock split and doubled the number of shares in existence. Each of those shares wouldn't remain at the same price it was before the split.

$1000 = $50 * 20

The market cap goes up when people are willing to pay a higher price for the token, not because more are printed.

So if the price stays the same while you're getting 12% APY, and there is 10% inflation, then you would go from $100 to $112, and the market cap would have to increase by 10% as well. That market cap increasing by 10% only happens due to buy pressure though. If there was no inflation, no staking, and the market cap went up by 10%, then your $100 would be worth $110.

Rebase DAOs recently have been offering >100,000% APY, but again this is how much your tokens will increase not your dollars. So they may offer 1,000,000% APY but if the inflation rate is 999,999% then your effective APY on your dollars is actually 1%.

If you put your money in the bank and they give you 0.1% interest, but the Fiat inflation is 5%, then your purchasing power is dropping by 4.9% per year.

If you want to comment the effective rate for tokens I can add them here for others to reference. These are rough approximations, DYOR!

• Ref: Effective APY = APY - Inflation
• DOT 2-4% = (12-14%) - 10%
• ETH2 3.8% = 5.2% - 1.4%
• ATOM 2% = 9.5% - 7.5%
• AVAX -22.3% = 9.7% - 32% (Until max supply is reached)
• FTM 1.1% = 14.8% - 13.7%
• ALGO 0% = (5-6%) - (5-6%) (Until max supply is reached)

TLDR: Effective APY = Staking APY - Inflation. If you are only looking at the staking APY and not the inflation rate then you are not seeing the full picture.