APY （DeFi）

Annual Percentage Yield (APY) is the annualized rate of return on an investment or loan, accounting for compound interest earned or paid over a year.

What is APY （DeFi）?

APY measures the total interest earned on a deposited digital asset or paid on a borrowed amount in decentralized finance (DeFi) protocols, expressed as a percentage and calculated over a year, factoring in compounding. Unlike simple interest, which applies only to the principal, APY includes interest earned on both the principal and accumulated interest, making it a more accurate metric for returns or costs. In DeFi, APY is typically variable, fluctuating based on supply and demand in liquidity pools, recalculated per blockchain block (e.g., every ~12 seconds on Ethereum).

For example, in Aave, a leading DeFi lending protocol, depositing 1,000 USDC into a stablecoin pool might yield a 5% APY in September 2025, meaning a lender could earn ~$50 over a year if rates remain constant, with interest compounded continuously via aTokens. If pool utilization rises (e.g., 90% of funds borrowed), APY might spike to 8%, increasing returns to ~$80. Conversely, a borrower on Compound taking a 1,000 USDC loan at 6% APY would owe ~$60 in interest annually, assuming full-year borrowing and stable rates. Platforms like Yearn Finance optimize APY by auto-compounding returns, achieving effective yields up to 10% on stablecoins in 2025, per protocol data. However, volatility in rates—driven by market conditions or protocol parameters like Aave’s 80% utilization threshold—can affect outcomes, and users must account for risks like smart contract failures or liquidations when borrowing.