APY vs APR
APR (annual percentage rate) is a simple yearly rate. APY adds the effect of compounding — earning returns on your earlier returns. If a 10% APR compounds monthly, the APY is about 10.47%. The more often it compounds, the bigger the gap.
Why crypto APYs are different
In traditional savings the rate is set and stable. In crypto, APYs are typically calculated from recent activity and change constantly:
- Lending: driven by borrower demand
- Liquidity pools: driven by trading fees and pool size
- Staking: driven by protocol rewards and how much is staked
- Incentives: temporary token emissions that can end
How to judge a yield
Ask where the yield comes from. If you can't identify a real source — borrowers paying interest, traders paying fees, network rewards — the number may be paid from new deposits or unsustainable emissions. Extremely high APYs deserve extra skepticism.
Risks behind the number
Yield doesn't account for the token's price falling, smart-contract exploits, impermanent loss or lockup periods. A high APY paid in a token that drops 50% is not a high return.
Compare like with like
Check whether a quoted rate is APR or APY, whether it's variable, in which asset it's paid, and what the withdrawal terms are.
A quick reasonableness test
Compare a quoted yield with what the same asset earns from the most conservative source available, such as lending a stablecoin to a large, established protocol. A yield far above that needs an explanation: extra risk, a temporary incentive, or a payout in a volatile token. If you can't explain the gap, treat the number as marketing rather than an expectation.