Recently, I noticed that many newcomers in crypto confuse two simple indicators that actually have a huge impact on how much they will really earn. I'm talking about APY in crypto — this is the annual percentage yield, which shows the profit you will get if you leave your assets on the platform for a whole year. But here’s the catch: it’s not just a percentage, but a compound interest, meaning that compound interest works in your favor.

I’ve noticed that APY in crypto is often confused with APR, but they are completely different things. APR is simply the annual rate without considering reinvestment, while APY accounts for the fact that your earnings are automatically reinvested and generate additional income. For example, if the APR is 2%, the APY might be 3% precisely because of the compounding effect — that extra 1% appears because interest is calculated on interest.

When I looked into how APY in crypto works in practice, I realized that the calculation isn’t complicated. You take the nominal rate, divide it by the number of compounding periods per year, add one, raise it to the power equal to the product of periods and investment duration, and subtract one. But in reality, it’s more complex because the crypto market is volatile, and liquidity risks and smart contract risks can affect the final figure.

In crypto, there are three main ways to earn income considering APY. The first is lending, where you lend your coins through a platform and earn interest. The second is yield farming, where you move assets between different protocols to seek maximum profit, but keep in mind that risks can be high, especially with new platforms. The third is staking, where you lock your tokens in a blockchain and receive rewards, often with the highest APY, especially in Proof of Stake-based networks.

Honestly, for an investor, APY in crypto is a more useful indicator than APR because it gives a real idea of how much you will earn in a year, considering all reinvestments. But it’s important to understand that it’s not a guarantee — it’s just potential earnings. Market volatility, liquidity risks, individual risk tolerance — all of these should be considered along with APY when choosing an investment strategy. Every method of earning in crypto has its pros and cons, so don’t rely on just one percentage figure.