What is APY anyway? If you want to earn with cryptoassets, you definitely need to understand it.

When talking about the yield of cryptoassets, the terms “APY” and “APR” often come up. Can you explain the difference between these two?

Simply put

APY = Annual yield including compound interest APR = Annual percentage rate excluding compounding

Even if the APR is 2%, if the APY is 3%, the 1% difference is the compound effect of “interest on interest.” The longer the time, the larger this difference becomes.

Where do cryptoassets come into play?

Lending: Deposit funds on the platform and earn interest Yield Farming: Providing liquidity to aim for returns (higher risk) Staking: Lock funds in the blockchain to earn rewards (recommended for PoS networks)

The formula is APY = (1 + r/n)^(nt) - 1, but in the case of cryptoassets, you also have to factor in volatility, smart contract risk, and liquidity risk.

Points to Note

The higher the APY looks, the more appealing it seems, but newer protocols also come with higher risks. Don't judge solely by the APY; it's essential to check the platform's audit status and operational track record as well. Compound interest is powerful, but it's also necessary to consider the volatility of the cryptoassets market.