APY (Annual Percentage Yield)
The effective annual return on deposits, including the effect of compounding. An APY of 5% on a lending platform means your deposit grows by 5% per year if rates remain constant.
APY tells you what your money actually earns in a year — after compounding is factored in. That last part is the whole game. A platform advertising 5% APY isn't just paying you 5% once at year-end; it's paying you a little each day (or week, or month), and those earnings start earning too.
If you're depositing stablecoins or crypto into a lending protocol, APY is the number you compare across platforms. It's the apples-to-apples figure — which is exactly why platforms lead with it.
How It Works
The math behind APY is straightforward: take the periodic interest rate, compound it over the year, subtract 1. A protocol paying 0.0137% daily compounds to roughly 5.13% APY — not 5.00%. That gap is small at low rates, but it widens fast as rates climb.
APY differs from APR (Annual Percentage Rate) because APR ignores compounding. If a platform shows APR, you're seeing the raw rate before your earnings start earning. Most DeFi protocols display APY. Some CeFi platforms show APR. Mixing them up makes comparisons meaningless.
Here's a concrete example: $10,000 at 5% APR compounded monthly becomes $10,511.62 after one year. The same $10,000 at 5% APY is already accounting for that compounding — so $10,500 is baked in. Small difference at 5%. At 20%, it's a $200+ gap.
Why It Matters
In crypto lending, rates move constantly. A DeFi protocol's APY shifts with supply and demand in the lending pool — sometimes hourly. That 8% APY you saw on Monday might be 4% by Friday. APY is a snapshot, not a promise.
What is Lending Pool?
A smart contract that aggregates deposits from multiple lenders and makes them available to borrowers. Each asset typically has its own lending pool with independent interest rates.
Full glossary entryBill's Take
In 25 years of mortgage lending, rates changed maybe a few times a month — and borrowers still called me in a panic. In DeFi, the rate on your deposit can move while you're asleep. The compounding math is the same as a traditional savings account or CD. The volatility of the rate itself is not. When you see a quoted APY on a lending protocol, treat it like a rate sheet from a wholesale lender: accurate right now, subject to change without notice.
What to Watch
High APY on volatile assets can mask real losses. If a protocol is paying you 15% APY on ETH but ETH drops 30% in that same period, you've lost money in dollar terms. APY measures yield on the asset — it doesn't protect you from the asset losing value. Always separate the yield question from the price-exposure question.
Yield Isn't Always What It Looks Like
Advertised APY figures sometimes include token rewards — governance tokens or incentive payouts on top of base interest. Those reward tokens have their own price risk and can evaporate fast. Always check whether the quoted APY is base yield, reward yield, or both combined. A 25% APY that's 20% token rewards and 5% real interest is a very different product than it appears.
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