Most people probably overlook that sometimes interest rates are termed APR or APY.
It’s fairly common for people to assume they are basically the same. Why wouldn’t they be if no one explained to them the subtle but very important difference between the two?
So let’s start with the basics and understand why there is an important distinction between the two.
This term is often used when quoting debt rates when you want to buy a house or car. This is the rate you will pay on an annual basis on the debt you will take on.
This term is more often used when looking at interest rates you receive such as in bank interest rates for deposits or investments that might be offered to you.
"My life has been a product of compound interest."- Warren Buffet
Let’s take an example to understand the power of compounding interest.
Let’s say we start with $1,000 and a bank is offering 10% interest per year. At the end of each year they give us the 10% interest which we reinvest. After 20 years, our balance would be: $ 6,727.50
Now let’s imagine that the bank paid that 10% interest per year on a quarterly basis. Now we have a reinvestment 4 times a year instead of 1 time a year. In this scenario, after 20 years, our balance would be: $ 7,209.57.
If this hypothetical bank compounds our savings every day, we’d get $7,387.03 at the end of 20 years.
It can sometimes be a bit hard to grasp the importance of compounding gains but the numbers should speak for themselves.
In the above example, compounding quarterly vs yearly resulted in superior gains over 20 years. The only thing that changed? Your compounding frequency.
Where DeFi can be particularly powerful is its ability to automate the distribution of interest as well as automate the compounding process.
Because it’s all battle-tested code running without middlemen and admin, interest is accrued in real-time when you lend your assets on lending platforms. Using DeFi platforms can help maximize your gains from interest because it’s auto compounding continuously without the user having to do anything but just sit back and watch the number go up. You’d be hard-pressed to find a bank that could offer real-time accrual of interest.
Sounds amazing right? Yes! Is there a catch? No!
Since a lender is receiving the interest in real-time, the borrower is paying the interest on their debt in real-time as well. Hence why there is no catch and the smart contracts take care of this movement of funds automatically and efficiently.
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What does all this have to do with DeZy? Simple - DeFi is complicated with high technical barriers to entry. Dezy helps you access the beauty of compounding with one click access to decentralised finance. Dezy is a tech stack that manages xSGD. We deploy xSGD to make a yield available to you.
Still unconvinced? See how Dezy compares to other options available to Singaporeans. Learn more in this deep dive.
Decentralised finance is an emerging field with fluid regulations. Learn more about the risks involved.