Technical Definition

Annual Percentage Yield (APY)

APY, or Annual Percentage Yield, expresses an estimated annual return while accounting for the effect of compounding.

By Crypto University Editorial
APRYield Farming

✦ Key Insight

APY is commonly displayed by: Staking platforms Lending protocols Liquidity pools Yield farms Crypto exchanges It can make products easier to compare, but an advertised APY should not be confused with a guaranteed return. Crypto APYs can change rapidly.

✕ Common Misconceptions

Treating APY as guaranteed

Comparing APY and APR as identical

Ignoring token-price changes

Ignoring reward-token inflation

Assuming the displayed rate will last a year

Ignoring protocol risk

Detailed Explanation

How It Works

Compounding means earned returns are added to the principal and can themselves generate additional returns.

If rewards are regularly reinvested, APY can be higher than the equivalent simple annual rate.

The actual result depends on how frequently compounding occurs and whether the underlying rate remains stable.

FAQs

Does APY include compounding?
Yes.

Can APY change?
Yes, especially in DeFi.

In Practice

“Two products advertise similar base rates. Product A does not compound. Product B regularly reinvests rewards. If everything else remains equal, Product B can produce a higher effective annual yield because returns generate additional returns.”

Dig Deeper

Yield Farming

Yield farming is a DeFi strategy in which users move or deposit crypto assets into protocols to earn fees, token incentives, interest, or other rewards.