Updated on Thu, 8 Feb, 2024 at 8:48 PM
TABLE OF CONTENTS
APY, or Annual Percentage Yield, in the context of cryptoassets, refers to the percentage of rewards a user can earn by participating in staking, liquidity pools or lending within the cryptoasset ecosystem. APY takes into account the effect of compound interest and provides a more accurate measure of the reward of engaging in such activities compared to the simple annual percentage rate of interest (APR).
Compound interest is a form of interest calculation based on the reinvestment of interest earned on the original principal, resulting in an exponential growth rate. That is, the interest earned in one period is added to the original principal and reinvested, resulting in a larger principal for the next period. This larger principal, in turn, generates more interest, which is again added to the original principal and reinvested, and so on.
It is worth clarifying that the APY, per se, has no risks as such, since it is only a mathematical formula. However, there may be some risks related to the use of this APY, which are more focused on the market in general. These are:
An example of an APY calculation
It can be calculated using the following formula:
APY = ((1 + r/n) ^ n) - 1
Where:
r = is the annual interest rate
n = the number of compound periods per year
Thus, for example, we have that:
If we invest 5000 €, with an interest rate of 12% per annum, compounded monthly, we will obtain an APY of 12.68%.
APY = ((1 + 12%/12) ^ 12) - 1
APY = 12.68% APY = 12.68% APY = 12.68% APY = 12.68
This means that the €5000 will be transformed into €5000 * 12.68% = €563,13. That would be the annual compound interest that would be obtained for an APY of 12.68 %.
Did you find it helpful? Yes No
Send feedback