Annual percentage yield is the total rate of return earned on an investment over the course of one year, including the compound interest calculated on the amount.
The Long Explanation
The rise of decentralized finance (DeFi) in cryptocurrency has provided crypto investors with multiple means of earning returns on their investment. One such means is via ‘staking’ of a crypto asset – whether this is on an exchange, a yield farm, or through a validator.
Staking serves as cryptocurrency’s equivalent of a savings account. You can deposit your crypto asset over a specified period of time and earn returns at the rate of the annual percentage yield (APY).
The annual percentage yield calculates the amount earned on a staked crypto asset over the course of a year. It tracks how the interest accumulates over time, via a system known as compounding interest.
Compounding interest refers to the amount received on the principal (the amount invested), as well as the interest accrued over time. Compounding interest provides investors with greater total returns over “simple interest” at the same rate and investment size.
If you’re looking to hold a particular crypto asset long term, investing your asset in a crypto savings account with annual yields may be your best bet. This system allows you to earn passive income while holding your investment.
Of course, the actual rate of your APY will be dependent on the platform, the duration of investment, and the digital currency in question. Additionally, the final amount earned will be dependent on the amount invested.
Be sure to do your research on the different crypto yield programs out there before deciding on the one to adopt. While seeking higher APYs, be careful not to fall for fraudulent yield farms with extravagant rates. Also factor variables like entrance barriers and fees when making a decision.