APY (Annual Percentage Yield)

APY and APR (Annual Percentage Rate) measure returns differently. APR is the simple interest rate without compounding. APY accounts for compound interest — reinvesting earnings to generate earnings on earnings. The formula is: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. For daily compounding, a 100% APR becomes 171% APY. This gap is why DeFi protocols typically advertise APY — it looks larger and accounts for automated compounding.

In DeFi, APY figures can appear astonishingly high — sometimes 1,000%+ for new yield farms. These numbers deserve extreme skepticism. Most 'high APY' comes from token emissions: the protocol is minting and distributing its own governance tokens as rewards. If the token's price collapses (which it often does when emission rates are high), the APY in real dollar terms may be deeply negative. The sustainable APY from fee revenue — trading fees, interest spreads, real yield — is typically in the 3–20% range for established protocols, not 500%. Olympus DAO (OHM) famously advertised 8,000% APY in late 2021 — the rebase rewards were sustainable only as long as new buyers kept entering, and the token crashed 99% from its peak.

Real yield — APY backed by actual protocol revenue rather than token inflation — became a key concept after the 2022 bear market destroyed many inflation-dependent strategies. Protocols like GMX, Gains Network, and Curve's 3pool distribution to veCRV holders were lauded for offering real yield from trading fees. When evaluating any high-APY DeFi opportunity, the first question should be: where does this yield actually come from?