Annual percentage return, or APY, is the rate of realized return earned on an investment. It takes into account the effect of compound interest.
Compound interest is automatically added periodically to the main balance, which increases the total amount on which interest is earned. Over time this translates into higher returns than the APR because the total deposit invested increases.
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What is the difference between APY and APR?
The annual global rate, or APR, is the rate earned during the entire period without taking compound interest into account.
The APR uses simple interest, which means that earned funds are not automatically added to the capital. The only real difference between the two types of interest rates is the distinction between compound interest and simple interest.
Why do some platforms use UAV and others APY?
Banks, financial institutions, and crypto platforms all use UAVs and APYs interchangeably to make a lending rate or a loan rate attractive.
Loan services typically advertise the APR they will charge because it doesn’t take compound interest into account, which makes it look like a lower fee. It would probably scare many borrowers if they knew how high the interest could be if they didn’t pay the principal within the allotted time.
Lending services tend to advertise the APY they offer for the opposite reason: it makes the interest rate that the lender will get for the provision of an asset much more attractive. It helps attract many investors because the number is higher than it would be like an APR. However, many crypto lending services will tell you an APY but won’t actually aggravate your interest. This means that unless you manually combine your interest, you will only receive the APR and none of the benefits of compound interest. DeFi services and crypto exchanges often have auto-compounding options and simple options of interest.
How APY works for Crypto
APY in cryptocurrency works a little differently than traditional finance. This is because instead of receiving an interest rate based on the dollar value of your holdings, you receive an interest rate based on the amount of assets provided. For example, if you were to get 5% APY and deposit 1 Bitcoin, you would get 0.05 BTC in interest after a year. The value of Bitcoin does not affect the interest rate you receive. This can make crypto APY much more attractive than traditional investment options. However, as stated earlier, the platforms will indicate an APY but may not actually be composed for you.
There is something else to consider when looking at crypto APYs, and that is impermanent loss. The highest APYs you can get for cryptocurrencies are always for liquidity pools, where users deposit two assets in dollar equivalent amounts to receive rewards from transaction fees. When using these liquidity pools, you are likely to experience impermanent losses, however, as long as the interest rate received exceeds the loss, it is still a worthwhile investment.
What to expect in returns for Crypto
As mentioned in the previous section, the returns you receive for cryptocurrencies are based on the amount of the asset you provided. This can result in extremely high returns if the asset increases in value in conjunction with the receipt of compound interest.
The main thing to note is that for many DeFi services, the rate will drop over time, as more users add their resources to the pool. Many of these services also have a higher payout at the beginning to attract interest before reducing it to realistic figures. When liquidity pools are first launched, they always have extremely high APYs because there is very little activity provided. That APY can drop exponentially in minutes depending on how quickly liquidity is added by users.
When using centralized services such as Crypto Earn, it is equally possible that interest rates will decrease over time, but it is less easy for them to change it without warning, since they have regulations to follow. This means that the interest rate can fall from 5% to 3%, but it will be done as a change after a term, rather than on the fly as in the case of DeFi.
In general, a typical return for crypto assets on an exchange is between 2 and 15%, with the upper end of that spectrum for stablecoins and the lower end for extremely popular assets such as Bitcoin and Ethereum.
For DeFI services such as liquidity pools rates can be much higher, but as already mentioned, rates are likely to fall fairly quickly. That said, you can leverage something like 1000% APY for a short period of time before it drops to normal levels as users add liquidity. For more stable DeFI services such as vaults, interest rates are roughly the same as for an exchange, but they can also be lower if there is a lot of supply and little demand for the asset to be borrowed.
Overall, expect to receive higher returns than a traditional savings account or bond, but don’t expect ridiculously high interest yields to last too long when they’re available.
