What is APY?
APY (Annual Percentage Yield) is the effective annual rate of return, taking compounding into account. If a DeFi protocol pays 1% per week and you reinvest those earnings, your APY is higher than 52% because each week's yield earns yield the following week.
APY vs APR
| Metric | Definition | Compounding |
|---|---|---|
| APR | Annual Percentage Rate | No |
| APY | Annual Percentage Yield | Yes |
A protocol paying 1% weekly has an APR of 52% but an APY of approximately 67.8% (with weekly compounding).
Why DeFi APYs can be very high
DeFi protocols can offer high APYs because they eliminate the bank's margin. In traditional finance, a bank borrows at 0.5% and lends at 10%, keeping 9.5%. In DeFi, that spread goes directly to depositors.
How to evaluate DeFi APYs
- Sustainability — is the yield from real economic activity (trading fees, loan interest) or from token inflation?
- Volatility — does the APY fluctuate daily or is it fixed?
- Risk — higher APY almost always means higher risk
- Compounding frequency — daily compounding produces significantly higher APY than annual
Fixed ROI vs variable APY
Some protocols like TurboLoop offer a flat ROI (e.g. 54% over 60 days) rather than a variable APY. This means you know exactly what you'll earn before you deposit — no surprises.