Glossary

Annual Percentage Yield (APY)

Plain-language definition Crypto glossary

Key takeaways

Annual percentage yield (APY) is the real rate of return earned on a deposit over a year, including the effect of compounding, which means earning returns on your previously earned returns.
Unlike a simple interest rate, APY assumes rewards are reinvested as they accrue, so the more frequently rewards compound, the higher the APY for the same headline rate.
In DeFi an APY can be very high but also unstable, because it often depends on volatile reward-token prices and changing demand, making a quoted APY a snapshot rather than a guarantee.

Definition

Annual percentage yield (APY) is the real rate of return earned on a deposit over a year, including the effect of compounding — that is, earning returns on your previously earned returns.

How it works

Unlike a simple interest rate (sometimes shown as APR), APY assumes rewards are reinvested as they accrue, so it captures the snowball effect of compounding. The more frequently rewards compound, the higher the APY for the same headline rate. In crypto, APY is quoted on staking, lending and liquidity-provision products.

Why it matters

APY lets you compare different yield opportunities on a like-for-like basis. In DeFi the figure can be very high but also unstable, because it often depends on volatile reward-token prices and changing demand, so a quoted APY is a snapshot, not a guarantee.

Example

A deposit advertised at 10% APY would grow to about 110 units after a year if the rate held and rewards compounded as assumed.

FAQ

Frequently asked questions

What is the difference between APY and APR?

APR is a simple interest rate that does not account for compounding, while APY includes the effect of reinvesting rewards as they accrue. For the same headline rate, APY will be higher than APR, and the gap grows the more frequently rewards compound. APY therefore gives a more complete picture of actual yearly returns.

Why are DeFi APYs sometimes so high?

Very high APYs in DeFi often reflect rewards paid in a volatile token whose price can fall sharply, plus strong but temporary demand for a new product. Because these factors change quickly, a quoted APY is a snapshot, not a guarantee, and the realized return can be far lower. Treat unusually high figures with caution; this is not financial advice.

Does a higher APY always mean a better deal?

Not on its own. A higher APY can come with greater risk, such as exposure to a volatile reward token or a less proven protocol. APY lets you compare opportunities on a like-for-like basis, but it should be weighed against the risks and the stability of the rate.