Annual Percentage Yield
Annual Percentage Yield (APY) represents the real rate of return earned on an investment over a year, including the effects of compounding interest. In the crypto world, APY is commonly used in decentralized finance (DeFi) protocols, especially for yield farming, lending, and staking.
What is APY?
APY measures the interest rate over a year, accounting for the compounding of returns. This metric helps investors understand the full earning potential of their investment in a DeFi protocol, such as yield farming or staking.
How Does APY Work?
The calculation of APY involves several steps:
Interest Rate: APY is based on the interest rate offered by a platform for lending, staking, or other activities.
Compounding Frequency: The frequency of interest compounding (e.g., daily, weekly) affects the final APY, with more frequent compounding leading to higher yields.
Total Return Calculation: APY accounts for all compounded returns, providing a realistic view of potential earnings over a year.
Why is APY Important?
APY is a valuable metric for investors for several reasons:
Comparison Tool: APY allows users to compare the yield across various DeFi protocols and choose the most profitable options.
Informed Decisions: By understanding APY, investors can better estimate their returns and make strategic financial decisions.
Transparency: APY provides clear insight into the total return on investment, making it easier for users to understand what they’re earning.
In summary, APY is a critical metric in DeFi, offering a complete view of potential returns by incorporating the effects of compounding interest.