What Is APY (Annual Percentage Yield)?
Also known as: Annual Percentage Yield, Effective Annual Rate, EAR
In short
APY (Annual Percentage Yield) is the annual rate of return on an investment calculated with compounding included. Because it assumes earned interest is added to the principal at intervals and earns further returns, it is higher than APR at the same interest rate.
APY takes into account the compounding frequency as well as the interest rate. The formula is APY = (1 + r/n)^n − 1, where r is the annual simple interest rate (APR) and n is the number of compounding periods in a year. For example, 10 percent APR corresponds to roughly 10.47 percent APY when compounded monthly and roughly 10.52 percent APY when compounded daily.
In the crypto world, APY is commonly displayed for staking, lending protocols, liquidity mining and yield aggregator vaults. Platforms such as Yearn Finance automatically reinvest earned rewards to deliver compound returns. As compounding frequency increases, the gap between APY and APR widens; however, it should be remembered that each reinvestment has a transaction fee cost.
The APYs shown on platforms are estimates based on the assumption that current rates will remain unchanged for a year. Because rewards are variable, the realized return can be very different. In particular, four- or five-digit APYs generally come from newly minted reward tokens, and when the price of these tokens falls, the return erodes quickly.
Last updated: · This content is for information purposes only and is not investment advice.