What is APY in Crypto?
APY (Annual Percentage Yield) explained for crypto. How it's calculated, why it differs from APR, and how to use it when comparing yields.
APY stands for Annual Percentage Yield. It represents the real return on your crypto investment over one year, including the compounding effect — earning interest on your interest. It's the most accurate way to compare yield opportunities.
APY vs APR: What's the difference?
APR (Annual Percentage Rate) is the simple annual interest rate without compounding. APY accounts for the fact that interest can itself earn interest when it's reinvested. This makes APY always higher than APR for the same underlying rate.
For example: a 5% APR compounded daily gives a 5.13% APY. At higher rates, this gap widens significantly. Always compare APYs — not APRs — when evaluating yield opportunities.
How is APY calculated?
The formula is: APY = (1 + r/n)^n - 1, where r is the annual rate and n is the number of compounding periods per year. DeFi protocols often compound continuously, maximizing APY from a given APR.
Why do crypto APYs change so often?
Unlike bank interest rates set by central banks, crypto yields are driven by market supply and demand. When more people deposit, yields fall. When borrowing demand rises, yields go up. This is why you see live rates changing by the hour on DeFi platforms.
Key takeaways
- →APY includes compounding — APR does not
- →APY is always higher than APR for the same rate
- →Compare APYs across platforms for accurate comparisons
- →Higher APY usually means higher risk — check the risk level
- →Rates change constantly in DeFi — always verify current figures