Annual Percentage Yield (APY) measures how much an interest-bearing deposit, staking position, or liquidity pool actually grows over a year once compounding is factored in, not just the nominal rate a platform advertises. Because it rolls earned rewards back into the principal, APY is almost always higher than the flat rate it is derived from.

The standard formula is APY = (1 + r/n)^n − 1, where r is the nominal annual rate and n is the number of times per year that interest compounds. A 12% nominal rate compounded monthly works out to roughly 12.68% APY, while the same rate compounded daily creeps even higher. Traditional banks typically compound monthly or quarterly, but many crypto protocols compound continuously, sometimes with every new block, so the gap between the quoted rate and the real return can be larger than in conventional finance.

APY shows up across staking rewards, yield farming, lending markets, and liquidity pools, wherever a platform auto-reinvests payouts rather than paying them out as simple interest. It is closely related to but distinct from Annual Percentage Rate (APR), which ignores compounding and is more commonly used for stating borrowing costs.

A headline APY is never guaranteed. Rates float with protocol demand and token emissions, rewards are frequently paid in the platform's own token so their dollar value can fall even as the token count rises, and lockups, fees, or smart contract risk can all erode the advertised figure. Comparing two offers only makes sense once both are confirmed to be quoting APY, not one APY against one APR.