What is APY in crypto and how do we calculate it?

Crypto’s bear market has been plagued by precipitous price plunges. The value of Bitcoin, Ethereum and other popular currencies has fluctuated by over 50% in the past year, and even the UST stablecoin has lost its dollar peg.

In this climate, traders are increasingly looking towards passive-income opportunities, which allow you to stake or invest your crypto and receive a steady return over time (think a bond or U.S. Treasury in the old world, but made digital). By committing your tokens in this way, you’re increasing overall ecosystem liquidity or supporting the work of validators, and stabilising your own portfolio at the same time.

However, before you dive into one of these opportunities, it’s important you know exactly what return you will get. You may have seen a crypto project promising you 5%, 10% or even 20% returns, but what does that actually mean in practice?

Well in all likelihood they’re referring to the APY, which determines the total amount of interest that you will earn each year (in fact if you’ve been around the scene a while, you’ve probably seen some projects promising the ‘best APY in crypto’ or something similar).

Now we know what you’re thinking: this is just the interest rate, right? Well no actually, because APY also takes the effects of compounding into account.

Crypto assets are usually compounding investments. This means that, instead of simply collecting a flat yield once a year, they harvest, and reinvest, the yield at regular ‘compounding’ intervals to boost your rewards. 

At each compounding period, the interest is added onto your initial investment. Then when the next compounding interval rolls round, the interest is calculated on the updated figure, not the original.