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APY Meaning

Annual percentage yield (APY) measures the effective annual return on an investment or deposit after accounting for the effects of compounding. Unlike APR, which looks only at the simple interest rate, APY reflects how often interest is added to the principal and starts earning interest itself. In DeFi and crypto, APY is widely used to quote returns on:

Staking programs for proof-of-stake networks
Lending markets where interest is continuously accrued to depositors
Liquidity mining and yield farming strategies that distribute rewards in tokens, which can themselves be reinvested

The general idea is: APY = (1 + r / n)ⁿ − 1 where r is the nominal annual interest rate and n is the number of compounding periods per year.

If interest is compounded more frequently-say, daily or continuously-the APY will be higher for a given nominal rate. For example, a protocol that advertises a 20% APR with daily compounding will produce an APY slightly above 22%, because each day’s interest is added to the principal and starts earning its own interest. By contrast, a 20% APR with no reinvestment would yield exactly 20% over the year.

In practice, APY figures shown on dashboards or marketing materials are often estimates, based on recent rewards and current parameters. In dynamic environments where token prices, utilization, or reward schedules change, the realized APY can move significantly over time.

Users should therefore treat quoted APYs as indicative rather than guaranteed and consider factors such as token volatility, smart contract risk, and lock-up conditions when evaluating opportunities. APY is a useful tool for comparing yield opportunities across platforms, as long as you understand the assumptions behind the calculation and the risks associated with sustaining those returns.

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