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What does APY mean in crypto terms?

APY, or Annual Percentage Yield, refers to the annual rate of return that an investor can expect to earn from staking, lending, or yield farming with their digital assets.

Just like in traditional finance, the APY takes into account the effects of compounding interest. In the world of decentralized finance (DeFi), cryptocurrency holders can lend their assets to others via smart contracts, or stake their tokens in a liquidity pool to facilitate transactions on the network. In return for providing these services, they earn rewards or interest on their assets. This interest, when annualized and including the effects of compounding, is referred to as the APY.

One unique aspect of APY in cryptocurrency is that the rates can often be significantly higher than those in traditional finance, sometimes even reaching triple-digit percentages. However, it's important to note that these high returns come with a significantly higher level of risk, due to the volatility of the crypto market, potential smart contract vulnerabilities, and other factors.

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