A percentage that represents the rate of return on an investment or deposit, factoring in the effect of compounding over a year. In the context of finance and crypto, APY is commonly used to describe the returns from staking, yield farming, or lending cryptocurrencies, where interest or rewards are compounded over time. APY takes into [...]

By Published On: November 30, 2024

A percentage that represents the rate of return on an investment or deposit, factoring in the effect of compounding over a year. In the context of finance and crypto, APY is commonly used to describe the returns from staking, yield farming, or lending cryptocurrencies, where interest or rewards are compounded over time. APY takes into account not only the interest rate but also how frequently the interest is applied (compounded), making it a more accurate reflection of potential earnings compared to APR (Annual Percentage Rate), which does not include compounding.

Key Features of APY:

  1. Compounding: Unlike APR, which simply shows the rate of return, APY reflects the effect of interest being reinvested (compounded) over a year. The more frequently interest is compounded, the higher the APY will be.
  2. Cryptocurrency and DeFi: APY is often used in decentralised finance (DeFi) platforms where users earn rewards by staking or providing liquidity in cryptocurrency pools.
  3. Risk Factor: In crypto, the APY can fluctuate based on market conditions, the platform’s performance, and the underlying cryptocurrency’s value.

Example:

If you deposit £1000 with an interest rate of 10%, compounded monthly, the APY would be higher than 10% because the interest earned is reinvested each month, resulting in a greater total return at the end of the year.