Definition
APY, short for Annual Percentage Yield, is a metric that expresses the total yearly return on a deposit or investment, taking compounding into account. In DeFi, APY is commonly used to describe how much a user’s crypto assets may grow over a year when rewards are periodically added back to the balance. Unlike simple interest measures, APY reflects the effect of earning returns on both the original amount and previously earned rewards. It provides a standardized way to compare yield opportunities across different protocols and pools.
APY is closely related to APR, but APR typically represents a non-compounded annual rate, while APY assumes that rewards are reinvested according to a specific compounding schedule. In DeFi platforms that use auto compounding, the APY figure incorporates the impact of frequent reinvestment of rewards into the same position. Because APY depends on both the base rate and the compounding frequency, the same APR can produce different APYs under different compounding conditions. As a metric, APY is descriptive rather than a guarantee, and it can change over time as protocol conditions or reward rates shift.
In Simple Terms
APY tells how much a crypto balance could grow in one year when rewards are regularly added back into that balance. It turns the idea of earning interest on interest into a single, easy-to-read yearly percentage. When a DeFi platform shows APY, it is summarizing both the basic rate of return and how often rewards are compounded. This makes APY a convenient snapshot of potential growth, even though the actual rate may move up or down over time.