APR vs APY and Liquidation explained
APR vs APY
APR and APY are both interest rates that a user earns for saving or lending their money to a borrower and in most cases within cryptocurrency, this is when a user stakes their coins or tokens i.e. deposit their tokens to a wallet and connects to a smart contract to earn interest. APR is a simple interest that is paid to the lender without compounding interest which means that a lender is paid that specific percentage of their capital as interest and during subsequent payments, the APR applies to the principal money (Capital) without adding the interest generated for example, if a user lends $100 at an APR of 10% the user earns $10 after one year which means their capital becomes $110 after two years it becomes $120, after three years $130 and so on. While APY factors in compound interest which means that the next interest rate is calculated by adding the previously generated interest to the capital. If a user lends $100 at an APY of 10% with yearly compounding interest, after the first year, the capital becomes $110 and after the second year, it becomes $110+$11 = $121, with the $11 being the interest generated from the new capital amount of $110. For the third year, the capital becomes $121+$12.1 = $133.1 and so on, in this example, the compounding frequency is yearly, in some cases, it can be monthly, daily, quarterly etc. the compounding frequency determines at what time the generated interest is added to the capital to get the next yield.
Liquidation
A simple definition of the term liquidation means the conversion of assets into cash due to the inability of a company to financially continue its business, but within the context of crypto trading, the term is used in margin and futures trading where users can open market positions using borrowed assets from either the crypto exchange or other users, a long position is an assumption that the price of an asset will go up while a short position is an assumption that the price of an asset will go down. In this case, liquidation refers to the closure of a trader’s open market positions when they no longer have sufficient capital (margin) to maintain the open positions, for example, if a user opens a long market position using a $10 margin with leverage of 10X the trader will be borrowed $90 and the position size becomes $100 if the price of the asset drops by 10% the position size becomes $90 which is the exact amount borrowed, leaving the trader with no more margin (the initial capital of $10 used to open the position has been lost) and if it drops further the open position will be closed in this case the position has been liquidated since the user does not have any margin left to maintain the open position, so in simple terms, liquidation is the closure of open market positions due to lack of margin to maintain the open positions by the trader.
