You’ve probably seen APY numbers in DeFi – 10%, 50%, sometimes even higher. But what does APY actually mean, and why should you be careful?
APY stands for Annual Percentage Yield. It’s like a calculator that shows how much your money could theoretically grow in one year, including compound interest. Think of it as a prediction, not a promise.
Here’s the math: If you deposit $1,000 at 20% APY, the calculation assumes you’d have $1,200 after one year. But here’s the crucial part – APY changes constantly based on market conditions, demand, and protocol risks.
APY includes compounding, meaning your earnings get added to your principal and earn more returns. It’s like reinvesting dividends automatically. However, unlike bank interest, crypto APY is highly volatile and can drop to zero overnight.
You earn APY by lending crypto, providing liquidity, or staking tokens. But remember – these aren’t guaranteed returns like traditional savings accounts. They come with serious risks: smart contract bugs, protocol failures, impermanent loss, and regulatory changes.
That attractive 100% APY? It often signals extreme risk or unsustainable tokenomics. Many high-APY projects have collapsed, leaving investors with total losses.
Before chasing yields, understand that higher APY almost always means higher risk. Start with established protocols, lower APY rates, and only invest money you can afford to lose completely.
APY is a useful metric for comparing opportunities, but never mistake it for guaranteed profit. Always prioritize security over returns.