The effective annual rate of return that includes the effect of compounding interest.
Annual Percentage Yield (APY) is the effective yearly return on an investment including the effects of compounding. In crypto, APY is widely used to show how much users can earn when staking rewards or yield farming incentives are automatically reinvested.
APY provides a more accurate picture of total earnings when rewards are distributed frequently.
How APY Works in Crypto
Compounding means your rewards generate additional rewards over time. The more often compounding occurs — hourly, daily, weekly — the higher the APY relative to APR.
DeFi platforms use APY for:
Auto-compounding vaults
Staking programs with reward reinvestment
Yield aggregators
Savings products and stablecoin vaults
APY reflects exponential growth, not just linear returns.
APR vs. APY
While APR shows the simple annual rate:
APR excludes compounding
APY includes compounding
Example: If a platform offers 10% APR but compounds daily, your APY may be around 10.5%. With more frequent compounding — especially on DeFi protocols — the gap widens.
Use APY when:
Rewards are continuously reinvested
You want true long-term earnings estimates
Comparing yield-optimizing vaults or compounding strategies
Examples in Practice
A vault that auto-compounds LP rewards may advertise 50%+ APY.
Staking ETH through a liquid staking protocol may show APY, as rewards are periodically added to the validator balance.
Savings platforms for stablecoins typically show APY for clarity.
Summary
APY represents the real, total annual return including compounding. It is the preferred metric for evaluating DeFi yields where earnings are reinvested over time.
