APY (Annual Percentage Yield)
The real rate of return on an investment, taking into account the effect of compound interest. APY represents what you would earn over a year if rewards are automatically reinvested. APY is always higher than APR when compounding occurs more than once per year. Extremely high advertised APYs in DeFi often signal unsustainable tokenomic models or elevated risk.
“A staking pool advertising 10% APY means your rewards are automatically reinvested to earn additional returns, compared to 10% APR where you must manually compound.”
APR (Annual Percentage Rate)
The simple annual rate of return on an investment, not accounting for the effect of compounding. In DeFi, APR represents the annualized yield you would earn if rewards were not reinvested. APR is always lower than or equal to APY for the same investment because APY factors in compounding.
Yield Farming
The practice of strategically deploying crypto assets across DeFi protocols to maximize returns through a combination of trading fees, token rewards, lending interest, and liquidity incentives. Yield farmers actively move capital between protocols to chase the highest yields, often compounding returns by reinvesting rewards. Higher yields typically come with higher risks, including impermanent loss, smart contract exploits, and token devaluation.
Staking
The process of locking up cryptocurrency as collateral to support blockchain network operations — specifically validating transactions and producing blocks — in exchange for rewards. Staking is the core economic mechanism of Proof of Stake blockchains. Stakers earn yield from block rewards and transaction fees but risk slashing (losing a portion of their stake) for misbehavior or extended downtime.