Annual Percentage Yield (APY)

When DeFi platforms advertise returns, they typically express them as either APR or APY. APR stands for Annual Percentage Rate: it is the simple interest earned over a year without accounting for reinvestment. APY stands for Annual Percentage Yield: it shows the effective return after compounding, meaning profits are periodically reinvested so they start earning returns of their own. The same underlying rate produces a higher APY than APR whenever compounding occurs more than once a year.

Compounding is the mathematical process where your earned returns are added to your principal and then begin earning returns themselves. The more frequently compounding happens, the more powerful it becomes. If a protocol earns 1% per week, the APR is roughly 52%. But if you reinvest those weekly earnings, the APY is approximately 68% because each week’s earnings themselves earn interest for the remaining weeks of the year. The gap between APR and APY grows larger as the underlying rate increases.

In DeFi, APY figures can be eye-catching because some protocols compound rewards multiple times per day. It is important to read whether a quoted figure is APR or APY, whether it includes bonus token rewards alongside base fees, and whether those bonus tokens have stable value. A 10,000% APY paid in a token that loses 99% of its value delivers a much lower real return. Always look beneath the headline number at what you are actually being paid and in what form.

Example: A savings account at 12% APR earns exactly 12% if you withdraw interest each month and spend it. But if you leave the interest in the account to compound monthly, you end it at roughly 12.68% — that is the APY. Over decades, this gap becomes enormous. A DeFi protocol compounding hourly would push the APY even higher than monthly compounding, which is why the advertised numbers can look so much larger than the base rate.