Definition
Annual percentage yield (APY) expresses an annualized return that includes an assumed compounding effect. Compounding means reinvesting earnings so that those earnings can themselves generate additional returns.
How It Works
For a constant nominal annual rate r compounded n times per year, APY = (1 + r/n)^n − 1. At 10% compounded twice yearly, APY is 10.25%, assuming each reinvestment earns the same rate and there are no costs. A platform’s displayed APY may instead annualize recent performance, so its methodology matters.
Key Considerations
APY is not a guarantee that reinvestment will occur or that a rate will persist. Claiming costs, minimum amounts, changing rewards and withdrawal restrictions can reduce realized compounding. Compare like-for-like assumptions and distinguish gross from net figures. A token-denominated APY also excludes the effect of changes in the token’s market price unless explicitly stated otherwise.