APY (Annual Percentage Yield)
Annual Percentage Yield (APY) is the real rate of return earned on an investment over one year, accounting for compound interest. In crypto, APY is commonly used to advertise staking and DeFi yields, though rates can be highly variable.
Understanding the Concept
• Includes compound interest (interest on interest) • Higher than APR for the same nominal rate due to compounding • Crypto APYs can change daily based on protocol activity • Very high APYs (100%+) often come with significant risks
Real-World Example
A DeFi protocol offers 12% APY on USDC deposits with daily compounding. If you deposit $10,000, you'd earn roughly $1,268 after one year (not $1,200) because your interest compounds daily. However, smart contract risks, impermanent loss, or token devaluation could eat into those gains.
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