APY, Interest Rates, and Compounding in Crypto Yields
Summary
This explainer distinguishes a base interest rate from annual percentage yield (APY). A simple interest rate describes earnings or borrowing costs without including reinvestment, while APY reflects compounding over the year. The article illustrates the difference with a hypothetical deposit earning 12% and monthly compounding: the stated APY is 12.68%, producing greater annual earnings than the same nominal rate without compounding. A month-by-month example shows how reinvested rewards become part of the balance and earn further returns.
The discussion applies the comparison to crypto products, including yield farming, staking, savings, and lending. It notes that DeFi APY can vary with tokenomics, liquidity, and protocol mechanics, while interest rates may be fixed or variable. The article also compares APR with APY and presents APY as more informative when rewards are reinvested. Actual outcomes depend on changing rates and product terms; the example is illustrative, not evidence of a guaranteed return. The source cautions that crypto assets involve risk and that the material is not investment advice.
Key ideas
- APY includes the effect of compounding, while a simple interest rate does not.
- Reinvested earnings can increase the balance that generates later returns.
- The example contrasts a 12% base rate with a 12.68% APY under monthly compounding.
- DeFi yields can change with protocol mechanics, liquidity, and tokenomics.
- Comparisons should account for compounding and product terms, and yields are not guaranteed.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.