Compound Annual Growth Rate (CAGR) is a financial metric used to measure the average annual rate of growth of an investment or asset over a specific period of time.
CAGR takes into account the compounding effect of returns, which makes it a valuable tool for assessing the performance of investments, including those within the DeFi ecosystem.
CAGR is calculated using the following formula:
CAGR = (Beginning Value / Ending Value)^(1 / Number of Years)−1
Where:
- Ending Value is the value of the investment at the end of the specified period.
- Beginning Value is the initial value of the investment at the beginning of the period.
- Number of Years is the number of years in the investment period.
In the context of DeFi, CAGR can be used to evaluate the performance of various assets, tokens, or investment strategies. For example, if an investor participated in a DeFi protocol and earned variable interest rates over a certain number of years, calculating the CAGR would give them a better understanding of their average annual return, factoring in the effects of compounding.
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