What Is APY in Crypto?
APY. Annual Percentage Yield. Yearly return on a position with compounding factored in.
Not the base rate. The actual result after rewards reinvest and start earning on top of themselves.
Simple version: earn rewards, leave them in, next period you're earning on a bigger number. Period after that, bigger still.
How Compounding Works
Deposit $1,000. Earn rewards. Don't touch them. Next period those rewards earn returns too. Keeps building.
Compounding frequency changes the outcome. Daily beats monthly. Monthly beats quarterly. Same underlying rate. Different end number depending on how often rewards get added back.
Formula: (1 + r/n)^n - 1. r is the annual rate. n is compounding periods per year.
- 10% underlying rate compounded daily: roughly 10.52% APY.
- 10% compounded monthly: roughly 10.47% APY.
- 10% compounded once yearly: exactly 10% APY.
Small differences at low rates. Gets significant fast at higher ones.
APY vs APR
APR. Base rate. No compounding. 10% APR on $1,000. End of year: exactly $1,100. Flat.
APY. Same base rate, compounding included. Rewards reinvested. Always higher than APR for the same underlying rate.
50% underlying rate compounded daily: roughly 64.8% APY. Same base as 50% APR. Very different end number.
Platforms showing APY look more attractive than ones showing APR at the same rate. Both describing identical yield mechanics. Just measured differently.
Check which one is displayed before comparing across protocols.
Auto-Compounding vs Manual
Auto-compounding. Protocol reinvests rewards automatically. Yearn, Beefy, similar yield optimizers built around this. Deposit once. Compounding runs without touching anything.
Manual. Platform pays rewards but doesn't reinvest. Sit unclaimed in the wallet. To compound, claim and restake manually. Every time that doesn't happen, actual return drifts toward APR not APY.
Gas fees on Ethereum make frequent manual compounding expensive on small positions. Below a certain size it costs more than it earns.
Displayed APY assumes continuous compounding. Compounding manually once a month means actual return is lower than the advertised figure.
Real Example
$5,000 into a yield vault. Underlying rate 8% per year. Platform auto-compounds daily.
APY: roughly 8.33%. After 12 months: $5,416.
Same $5,000, same 8%, no compounding. APR. After 12 months: $5,400.
$16 difference at 8%. Now run it at 60%.
60% APR no compounding: $3,000 earned. Total $8,000.
60% compounded daily: APY roughly 82.2%. $4,110 earned. Total $9,110.
Same deposit. Same base rate. $1,110 difference. Just from compounding.
The Problem With High APY
200% APY. 1,000% APY. Everywhere in DeFi. Rarely means what it implies.
Token emissions. Rewards paid in a new protocol token nobody has established value for. Massive supply printed to pay stakers. APY looks enormous because lots of tokens distributed. Each one worth less as supply inflates. Dollar value of those rewards collapses before the year is up.
Short snapshot window. APY calculated from recent reward rates projected forward. Protocol launched yesterday with peak initial emissions. That rate won't hold for a full year. The snapshot was taken at the most favorable moment.
Real APY from genuine protocol revenue is rare. Trading fees, interest spreads, real economic activity. Sustainable. Token emission APY is a marketing number.
APY and Token Price
APY denominated in whatever token is being earned.
50% APY staking a volatile token. Token drops 70% during the year. More tokens than started with. Worth significantly less in dollars.
Stablecoin APY sidesteps this. 8% APY on USDC means 8% more USDC. Dollar value intact. Lower headline number. No volatility eating the return.
Chasing high APY in volatile tokens during a bear market is one of the most consistent ways to end up worse off than holding cash.
APY FAQ
What's a realistic APY?
Stablecoin lending on established protocols: 3-8%. ETH staking: 3-5%. Newer protocols with token incentives: anywhere to thousands of percent. Higher the number, more likely emissions are behind it and the rate won't last. Real yield from protocol revenue rarely exceeds 20% sustainably.