What Is APY and How Is It Calculated?
APY, or annual percentage yield, is the yearly rate of return including the effect of compounding, assuming earnings are regularly reinvested. Crypto platforms use it to display staking, lending and DeFi yields.
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APY, or annual percentage yield, is the yearly rate of return including the effect of compounding, on the assumption that earnings are regularly reinvested. Compounding means the interest you earn is added to your balance and starts earning returns of its own. In crypto, yields from staking, lending and liquidity pools are usually shown as APY.
How is APY calculated?
The formula is APY = (1 + r/n)^n − 1, where r is the annual simple rate (the APR) and n is the number of compounding periods in a year. In other words, APY is the APR scaled up by how often returns are compounded.
For example, a 12% simple annual rate compounded monthly works out to an APY of about 12.68%. Compounded daily, the same rate gives roughly 12.75%. More frequent compounding widens the gap, though the extra benefit shrinks quickly.
APY vs APR: what’s the difference?
APR is the simple annual rate with no compounding. APY assumes earnings are reinvested. For the same product, APY is therefore always equal to or higher than APR.
When comparing offers, make sure they use the same measure. If one platform quotes APY and another quotes APR, identical returns can look different. And the advertised APY only materializes if rewards are actually reinvested; if they aren’t auto-compounded and you don’t restake them yourself, your result will be closer to the APR.
Where do high crypto yields come from?
The source of a yield is the key to judging whether it can last:
- Network rewards: On proof-of-stake networks, newly issued coins and transaction fees are paid to validators and stakers.
- Borrowing interest: On lending platforms, the interest paid by borrowers goes to depositors.
- Trading fees: Liquidity providers earn a share of the fees charged on swaps in their pool.
- Token incentives: Protocols hand out their own tokens to attract users; these yields are usually temporary.
Displayed APYs typically assume today’s rate holds for a full year. Annualizing one unusually good day can produce eye-catching figures that fall fast as demand and incentives change.
Token yield vs real return
APY usually measures growth in the number of tokens you hold. If your token balance grows 10% over a year but the token’s price falls 30%, you’ve lost money in dollar terms. Say you deposit 100 tokens worth $10 each and end the year with 110; if the price has slipped to $7, your $1,000 is now worth $770. If the reward is paid in a different token, its price matters too. Liquidity pools add a further risk known as impermanent loss.
Frequently asked questions
Is a 1,000% APY realistic? Rates like that usually come from short-term token incentives and fade quickly as the reward token’s price falls. If you can’t tell where a yield comes from, treat it with caution.
Is APY fixed? Most crypto APYs are variable. They move with total amount staked, pool size and borrowing demand.
How can I calculate APY myself? Find the APR and how often rewards are reinvested, then apply APY = (1 + APR/n)^n − 1. If you never reinvest, the APR is the rate to expect.