APY (Annual Percentage Yield) represents the real rate of return on an investment over one year, taking into account the effect of compound interest. In DeFi, APY is commonly used to express staking and yield farming returns.
APY differs from APR (Annual Percentage Rate) in that APY includes compounding. For example, a 10% APR compounded daily results in approximately 10.52% APY.
In cryptocurrency, APY can come from staking rewards, liquidity provision fees, lending interest, yield farming incentives, and protocol token distributions.
High APY offerings should be evaluated carefully. Unsustainably high yields may indicate token inflation, impermanent loss risk, smart contract risk, or potential rug pulls.