Yields & Returns

APY

Annual Percentage Yield

The annual return on investment including compound interest effects

Definition

Annual Percentage Yield (APY) represents the real rate of return earned on an investment, taking into account the effect of compounding interest. In DeFi, APY shows how much you can earn annually from lending, liquidity providing, or staking.

APY (Annual Percentage Yield) is a yield term used to understand annual return on investment including compound interest effects. In practice, it matters because it affects how users evaluate protocols, compare opportunities, and avoid hidden assumptions.

Example

A liquidity pool offering 15% APY means your initial investment would grow by 15% over a year with compounding.

How it works

In practice, the concept shows up like this: A liquidity pool offering 15% APY means your initial investment would grow by 15% over a year with compounding.

Why it matters

APY matters because small misunderstandings in DeFi can turn into bad pricing, liquidation, governance, custody, or smart-contract risk. A good mental model helps you compare protocols without relying on marketing language.

What to check

Treat it as a yield concept: separate sustainable revenue from temporary incentives, and always ask who pays the yield. The main checks are: Impermanent loss for LP tokens; Smart contract risk; Protocol risk.

Risks to Consider

Impermanent loss for LP tokens
Smart contract risk
Protocol risk

Common Questions

Where is the yield coming from?

If you cannot answer this question precisely, you are likely to be the source of yield.

What is the difference between APR and APY?

APR shows simple interest while APY includes compounding effects. APY is typically higher and more accurate for DeFi yields.

What does APY mean in DeFi?

APY means The annual return on investment including compound interest effects. The useful question is not only the definition, but how the mechanism changes risk, return, liquidity, or governance for the user.