APY - Annual Percentage Yield
The Annual Percentage Yield (APY) of an asset is a calculation that shows how much you will earn over the course of a year taking into consideration the compounding interest accrued.
When it comes to cryptocurrencies, APY is an important metric to consider, especially in the emerging DeFi sense. The latest movement is for users to store their assets in protocols that offer interest, but to determine the interest and if it is worthwhile storing your crypto assets in a certain protocol, you need to look at the APY.
The APY is like a cryptocurrency savings account in that you deposit your cryptocurrencies into a platform / protocol and receive a fixed rate of return over a specific period of time. APY is a method of calculating the amount of money earned on a money market account over the course of a year.
However, when the period is as long as a year, you need to take into account compounding interest. This means you will receive interest on the initial, or principal amount you put in, but your money will also grow on the interest that accrued through the period. Compounding makes it possible to create money over time, which is why it is such a strong instrument for investment.
In a cryptocurrency sense APY savings accounts offer you the chance to make interest on your asset through its different market cycles, all while still holding onto the coins. As the cryptocurrency space becomes more and more mainstream, offerings like APY accounts allow for your assets to grow in a traditional sense.
However, these accounts are also a gateway to DeFi and things like yield farming. Yield farming platforms often offer very high APYs in order to entice people to deposit their tokens into liquidity pools for the advancement of the protocol.
Since the DeFi summer of 2020, yield farmers have been chasing incredible opening thousand percent APYs. However, these protocols and coins are often highly risky and susceptible to rug pulls and other scams. Furthermore, the yield is earned in the form of protocol tokens, and is subject to highly volatile price swings.
Looking into DeFi protocols and their offerings in terms of APY, you will see a big range of percentages.
- Compound — 0.21% to 3% APY as of Aug. 2021
- Curve Finance — base APY:10%; Rewards APY 4-%
- PancakeSwap — APYs can go as high as over 400%
- Yearn.Finance — Users can earn up to 80% APY in Yearn
Another similar term to APY is APR (Annual Percentage Return) but it is important to differentiate these two. Both are used to calculate interest for investments like cryptocurrencies and they significantly affect how much you earn, but the big difference is APR does not take into account compounding interest.
APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which the periodic rate is applied. It does not indicate how many times the rate is applied to the balance.