APY (Annual Percentage Yield) is a term that indicates the total amount you can obtain from your investment or deposit in one year, considering the impact of compound interest. In Crypto, APY is mostly associated with staking or lending/yield farming platforms where the annual return on investment through digital asset lending or locking is shown to the user.
Say, a DeFi platform gives a 10% APY on a stablecoin deposit; this indicates that the investor’s assets could grow by around 10% after a year, in case of the rates remain constant and the investors receive their rewards in additional stablecoins. The distinguishing factor between APY and a simple interest rate (APR), in this case, is that the latter does not allow for compounding. Thus, with APY, your rewards are added to your balance and future rewards are computed on that larger amount.
Nonetheless, cryptocurrency is a highly volatile market and so the APY values can fluctuate very rapidly depending on market demand, liquidity and the specific protocol’s rules. Although high APYs look quite alluring they are usually associated with higher risks like bugs in smart contracts or declines in token prices.
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In summary, APY is a barometer that allows investors to measure returns over different platforms while including compounding, giving a clearer idea of how much their crypto can appreciate in the long run.