// GLOSSARY -- DEFI

What is APY (Annual Percentage Yield)?

1 min read Updated

Annual Percentage Yield (APY) is the annualized return on a DeFi position including the effect of compounding — the standard metric for comparing yield across protocols and strategies.

WHY IT MATTERS

APY tells you what you'd earn in a year if current rates persist and returns are continuously compounded. A 10% APY means $1000 becomes $1100 over a year (with compounding, slightly more than simple interest).

DeFi APYs are highly variable — they change with utilization, token prices, and incentive programs. A pool showing 100% APY today might show 10% tomorrow as more capital arrives and dilutes returns.

Beware: extremely high APYs (1000%+) usually reflect temporary incentives, inflationary token emissions, or unsustainable mechanics. Sustainable yields in DeFi are typically 3-15% for conservative strategies.

FREQUENTLY ASKED QUESTIONS

APY vs APR?
APR is simple interest (no compounding). APY includes compounding. APY is always equal to or higher than APR. DeFi typically shows APY to appear more attractive.
Why do DeFi APYs change?
They're driven by supply and demand. More depositors = lower APY (diluted returns). More borrowers = higher APY. Token incentives can temporarily boost displayed APY.
Is a high APY always good?
Not necessarily. High APY often comes with high risk — volatile assets, new protocols, or inflationary token rewards. Risk-adjusted return matters more than raw APY.

FURTHER READING

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