What is APY? How it works in crypto explained

APY (Annual Percentage Yield) is the real rate of return on an investment over a year, including compound interest. Unlike APR (Annual Percentage Rate), which does not factor in compounding, APY gives a more accurate picture of earnings in staking, yield farming, and crypto savings accounts.

For example, if a staking platform offers 10% APY, and your rewards compound monthly, you will earn more than 10% by the end of the year because of reinvested interest.

How APY works in crypto

APY is calculated using this formula:

APY = (1 + r/n)^n - 1

Where:

  • r = Annual interest rate (APR)
  • n = Number of compounding periods per year

If a platform offers 10% APR with monthly compounding (n = 12), the APY would be:

APY = (1 + 0.10/12)^12 - 1 = 10.47%

This means $1,000 staked at 10% APR (compounded monthly) would yield $1,104.70 after one year, instead of just $1,100 from simple interest.

APY vs. APR: What's the difference?

Many people confuse APR (Annual Percentage Rate) with APY (Annual Percentage Yield). The key difference:

  • APR does NOT include compounding (straightforward interest rate).
  • APY includes compounding, meaning you earn interest on both the principal and previous rewards.

A higher compounding frequency (daily, weekly, or monthly) results in a higher APY than APR.

Where is APY used in crypto?

  • Staking: Locking crypto in a network to earn rewards.
  • Yield farming: Providing liquidity to decentralized exchanges for passive income.
  • Crypto savings accounts: Earning interest on deposited crypto.
  • Lending platforms: Earning APY by loaning assets to borrowers.

FAQs

Why is APY higher than APR?

APY factors in compounding interest, so it results in higher returns over time compared to simple APR.

How often do crypto platforms compound APY?

It varies—some compound daily, weekly, or monthly, which impacts overall earnings. Always check platform details.

Is a high APY always good?

Not necessarily. Extremely high APYs, especially in DeFi, can indicate unsustainable returns or high-risk projects.

Other Glossary Terms

DeFi

DeFi, or decentralized finance, refers to blockchain-based apps that offer financial services without banks. It runs on smart contracts, giving users full control over their assets.

Blockchain trilemma

The blockchain trilemma is the challenge of achieving scalability, security, and decentralization at the same time. Learn why it matters — and how projects try to balance the trade-offs.

Crypto Address

A crypto address is a unique identifier used for sending and receiving cryptocurrency on blockchain networks. Linked to a wallet

Public Blockchain

A public blockchain is an open, decentralized network where anyone can participate, validate transactions, and view the ledger. Learn how it works, its benefits, and the challenges it faces in scalability and security.

Circulating Supply

Circulating supply is the number of crypto tokens actively available in the market. It impacts price, market cap, and scarcity, making it a key metric for investors. Bitcoin has ~19.5M BTC circulating, while Ethereum's supply fluctuates.

Block in a blockchain

A block in a blockchain is a digital record that contains a batch of verified transactions, along with metadata such as a timestamp, cryptographic hash, and a reference to the previous block.