Author: Catherine
Created:
In cryptocurrency, APY (Annual Percentage Yield) represents the actual rate of return an investment will earn over one year, taking into account the effects of compounding interest. This means it includes not just the interest earned on the original capital, but also the interest earned on previously accumulated interest, leading to a higher yield over time. APY is a key metric used in decentralized finance (DeFi) to show the potential earnings from activities like staking, lending, and yield farming.
Key Aspects of APY
- Compounding: The core of APY is compound interest, where earnings are reinvested and then earn their own interest.
- Annualized Return: APY expresses the potential return on your investment over a 12-month period.
- Versus APR: APY is often compared to APR (Annual Percentage Rate). While both measure returns, APR does not account for compounding, providing a simpler but less complete picture of earnings, according to Bit2Me Academy.
- Applications in Crypto: APY is commonly seen in crypto protocols and platforms that offer ways to earn passive income, such as:
- Staking: Locking up cryptocurrencies to support a network and earning rewards.
- Lending: Lending your crypto assets to others and earning interest.
- Yield Farming: Providing liquidity to decentralized exchanges (DEXs) to earn interest and fees.
Why APY Matters
- Forecasting Growth: APY helps investors forecast the potential growth of their capital over time, especially when interest is compounded frequently.
- Comparing Investments: It provides a standardized way to compare the potential returns of different crypto products, allowing for more informed investment decisions.
