APY (Annual percentage yield)
In short APY is the yearly return on a deposit including compounding, so it assumes earnings are reinvested; APR is the simple rate without compounding.
APY, or annual percentage yield, shows what a deposit would earn over a year if the rewards are reinvested along the way. It differs from APR, the annual percentage rate, which is the simple rate with no compounding. The more often rewards compound, the bigger the gap between the two numbers.
The math is APY = (1 + APR / n)^n - 1, where n is how many times per year the earnings compound. A 100% APR compounded daily works out to about 171% APY. In crypto, staking, lending, liquidity pools, and yield farms all advertise APY, and the figure is usually a projection based on recent rewards, not a fixed promise.
For token holders, the trap is reading APY as a sure return. On a farm, rewards are often paid in a token the protocol keeps minting, so as farmers sell, its price drops and the real yield in dollars shrinks. A displayed APY can swing by the hour as deposits flow in and out. Liquidity providers can also lose more to impermanent loss than they earn in fees.
When you see a four or five digit APY, ask where the yield comes from: trading fees, borrower interest, or token emissions. Check which token the rewards are paid in and whether compounding is automatic or needs manual claims that cost gas. Look at lockups and withdrawal fees too. Yield always comes with risk attached, and an unusually high number usually signals unusually high risk.