APY (Annual Percentage Yield): What It Is and How It Works

How APY is calculated

APY assumes that the interest or rewards you earn are added to your balance and then earn rewards themselves. The standard formula is:

APY = (1 + r / n)ⁿ − 1

where r is the annual rate as a decimal (the APR) and n is the number of compounding periods in a year.

A worked example with an illustrative 10% annual rate:

The more often rewards compound, the higher the APY for the same APR, although the gains get smaller as the frequency rises.

APY vs APR

• APR (annual percentage rate) is the simple yearly rate, without compounding.
• APY includes compounding, so it is always equal to or higher than the APR for the same rate.

Platforms that want a number to look bigger may show APY; borrowers usually see APR. When comparing offers, make sure you compare APY with APY. Also check whether rewards compound automatically or whether you have to claim and restake them yourself; if you do not, your actual yield is closer to the APR.

APY in crypto: why the number moves

You will see APY on staking pages, lending markets such as Aave, liquidity pools and yield farming dashboards. Unlike a fixed bank deposit rate, these numbers are usually variable:

• staking yields change with network issuance, fees and how much is staked;
• lending yields change with borrowing demand;
• farming yields often include reward tokens whose price can fall, so a high APY can shrink quickly in dollar terms;
• the figure is often an annualized snapshot of recent returns, not a promise.

An APY paid in a volatile token does not protect against a fall in that token's price, and smart-contract, liquidation or impermanent-loss risks come on top. Extremely high advertised APYs are a common feature of unsustainable schemes and rug pulls. Live APY values belong on the protocol's own page; this glossary explains the metric and does not recommend any product.