APY

APY, or annual percentage yield, is the yearly rate of return including the effect of compounding — earning interest on previously earned interest. It answers the question: if today's rate held for a full year and all earnings were continuously reinvested, how much would my deposit grow? Because compounding adds to the total, APY is always higher than the equivalent APR for the same underlying rate, and the gap widens as rates rise and compounding becomes more frequent.

A concrete example: a vault pays 1 percent per month. Quoted as simple APR that is 12 percent, but if each month's earnings are reinvested, a 1,000 USDC deposit grows to about 1,126.8 USDC after a year — an APY of roughly 12.7 percent. Auto-compounding vaults, which harvest and reinvest rewards automatically, typically advertise APY because compounding is built into the product.

A common misconception is that a quoted APY is a guaranteed annual return. In DeFi it is almost always a projection: the current instantaneous rate extrapolated over a year, even though rates change constantly with pool activity and reward emissions. Eye-catching triple-digit APYs usually come from emissions of a token whose price declines as farmers sell, so the realized yield can be a fraction of the headline. When comparing opportunities, check whether figures are APR or APY, and what the yield is actually paid in.