APY
APY (annual percentage yield) is a yearly rate of return that assumes your earnings are reinvested and compound, so you earn returns on earlier returns as well as on your original deposit.
How compounding lifts the number
With simple interest, only your original deposit earns. With compounding, each payout is added to the balance, and the next payout is calculated on the larger amount. APY expresses the result over one year, given a rate and how often it compounds.
The formula is: one plus the periodic rate, raised to the number of periods per year, minus one. For a 10% APR paid monthly, that is (1 + 0.10 / 12) to the power of 12, minus 1, which is about 10.47%. Paid daily, it is about 10.52%.
A worked example
Say you deposit 1,000 USDC into a lending protocol advertising 8% APY with daily compounding. If the rate stayed exactly the same all year and you never withdrew, you would end with about 1,080 USDC. If the rate dropped to 4% after three months, which is common for variable DeFi rates, you would end with roughly 1,050. The APY described what would happen under constant conditions, not what did happen.
APY versus APR
For the same underlying rate, APY is always at least as high as APR, so platforms often prefer to display it. Comparing one offer's APY with another's APR makes the first look better than it is. Some products compound automatically; others only reach the stated APY if you claim and reinvest rewards yourself, paying gas fees each time.
Why advertised APYs mislead
Many crypto APYs are variable snapshots based on recent activity. Very high figures are often driven by token rewards: if the reward token's price falls, the yield in dollars falls with it. Yields funded mainly by new token issuance can also be offset by dilution.
APY says nothing about risk. Smart contract exploits, platform insolvency, depegs of stablecoins or liquid staking tokens, and lockup periods can all cost more than the yield earns. Several centralized lenders offering high yields, such as Celsius, collapsed in 2022 and froze customer withdrawals.
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Frequently asked questions
Is APY guaranteed?
Usually not. In crypto most APYs are variable estimates that can change at any time, and the underlying platform or protocol can fail.
Why is APY higher than APR?
Because APY assumes earnings are reinvested and compound. The more often they compound, the bigger the gap.
What does a very high APY usually mean?
Often that the yield is paid in a volatile reward token, comes from a temporary incentive, or reflects higher risk. Check where the yield comes from before trusting the number.
Related terms
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