Overview
Annual percentage yield, or APY, is a metric that shows the total return on an investment over one year, including the effect of compound interest. In DeFi, it is the standard way to compare potential earnings from lending, staking, and liquidity provision. Unlike simple interest, APY assumes that earned rewards are reinvested, so it can appear higher than the underlying rate.
How It Works
DeFi protocols display an APY computed from the expected rewards a position accrues, often compounded over a specified frequency, such as daily. For lending, the rate comes from utilization and interest models; for liquidity pools, it combines trading fees and incentive token rewards. Because many rewards are paid in the protocol's own token, APY can be volatile and can decline as more capital enters.
Why It Matters
APY is the headline number users compare across strategies, but it can mislead: inflated token-based rewards may not hold their value, and compounding assumptions rarely match reality. A high APY can signal an attractive opportunity or a sign of unsustainable token emissions. Reading APY critically, alongside TVL, fee revenue, and token price trend, is part of competent DeFi analysis.
Related Concepts
APY measures the returns of Yield Farming, Lending, and Liquid Staking positions. It depends on Liquidity Pool fees and incentive token emissions, and it is tracked alongside TVL on analytics platforms.