Annual Percentage Yield — the real rate of return on an investment, including compounding interest.
Annual Percentage Yield (APY) measures the total return on a crypto investment over one year, including the effect of compound interest. Unlike APR (Annual Percentage Rate), which only reflects simple interest, APY accounts for interest earned on previously earned interest. In DeFi, APY is displayed on staking platforms, lending protocols, and yield farms to show potential returns. However, crypto APYs can be highly variable — a pool showing 500% APY today might drop to 50% tomorrow as more capital enters. High APYs often come with higher risk: impermanent loss, smart contract vulnerabilities, or inflationary token rewards that lose value over time. Always evaluate the source of yield and its sustainability.
APY (Annual Percentage Yield) in crypto can be misleading because it typically assumes continuous compounding and stable conditions — neither of which is guaranteed in volatile DeFi protocols. Unlike bank savings accounts where APY is relatively stable, crypto APYs can change dramatically based on total staked amounts, protocol revenue, token price, and market conditions. A 50% APY displayed on a DeFi protocol might only last days before declining as more capital enters. It's essential to distinguish between real yield (generated from actual protocol revenue like trading fees) and emissions-based yield (funded by printing new tokens, which dilutes existing holders). Real yield is sustainable; emissions yield creates selling pressure. Additionally, APY quoted in a protocol's native token may look high but lose value if the token's price drops faster than rewards accumulate.
Staking ETH through Lido earns roughly 3-4% APY — relatively modest but sustainable, backed by Ethereum's protocol rewards rather than inflationary token emissions.
APR (Annual Percentage Rate) is the simple interest rate without compounding. APY includes the effect of compounding — reinvesting earnings to earn on your earnings. A 10% APR compounded daily equals roughly 10.52% APY. In DeFi, always check whether quoted rates are APR or APY, as the difference grows with higher rates.