Finance
2 min read

APY (Annual Percentage Yield)

The yearly return on a deposit or investment, accounting for compound interest. Higher than APR for the same nominal rate. In DeFi, APY is also used to express yield-farming or staking returns, often varying with utilization.

APY vs APR

APY captures the effect of compounding within a year; APR doesn't. On a savings account paying 5% simple interest compounded monthly:

  • APR = 5.00%
  • APY ≈ 5.12%

The difference comes from interest earned partway through the year then earning interest itself for the remaining months. The more frequent the compounding, the larger the gap. A 5% nominal rate compounded daily gives an APY of 5.13%; compounded continuously, it's 5.13% as well (the gap converges quickly past daily).

For deposits and investments, APY is the honest number — what you actually earn. For loans, APR is the headline; the equivalent borrowed-money APY would be slightly higher.

The math

APY = (1 + r/n)^n − 1

where r is the annual rate and n is the number of compounding periods per year. For monthly compounding at 5%: (1 + 0.05/12)^12 − 1 = 0.05116 = 5.12%.

Why high-yield savings are worth checking

Most checking and traditional savings accounts pay APY close to zero (banks profit on the spread between deposit costs and lending rates). High-yield savings accounts at fintech-aligned banks routinely offer APYs within 0.5–1.0% of the federal funds rate. When the Fed funds rate is 4–5%, that means meaningful real yield on cash. The gap between a 0.05% traditional account and a 4.5% high-yield account is over $4,400/year on a $100,000 balance.

APY in DeFi

In DeFi, APY refers to the same compounding-adjusted return concept, applied to:

  • Lending — depositing tokens into protocols like Aave and earning interest from borrowers.
  • Staking — earning rewards for validating a proof-of-stake network.
  • Yield farming — combining the above with token incentives across multiple protocols.

DeFi APYs are often quoted as point-in-time rates that swing meaningfully day to day. A pool advertising "120% APY" usually means the current rate, annualized, ignoring future rate changes and any token-emission decay. Treating these as long-term yield estimates leads to disappointment; the rates exist precisely because they're transient.