In the world of digital asset investing, understanding how returns are calculated directly affects your asset growth efficiency. APY (Annual Percentage Yield), as the most common return metric in the cryptocurrency ecosystem, is often misunderstood or confused by investors. This article will start from scratch and provide a detailed breakdown of how APY works, its calculation mechanism, and its practical application in the cryptocurrency ecosystem.
What exactly is APY
Annual Percentage Yield (APY) is essentially an annual return calculation tool that accounts for the effects of compounding. Unlike a simple annual interest rate, APY includes the reinvested interest earnings during the period, resulting in a figure that is significantly higher than the simple interest rate.
Here's an intuitive example: If you invest $10,000 with an annual interest rate of 6%, but interest is compounded monthly, the final return will be higher than if interest were compounded once annually. This is the magic of compounding—you not only earn interest on the principal but also on the accumulated interest.