What is APY? I believe it's an essential concept that anyone involved in crypto investing should absolutely understand. Especially recently, more people are trying to earn through staking and yield farming.

First, APY stands for annual percentage yield, which indicates the actual return rate including the effects of compounding interest. In simple terms, it visualizes the overall return that includes interest on interest.

Many people confuse APR and APY, but this is extremely important. APR is a simple annual rate that does not consider compounding, while APY incorporates the effects of compounding. For example, even if an asset's APR is 2%, the APY calculated with compounding might be 3%. That 1% difference can become quite significant over the long term.

Specifically, APY is calculated with this formula: Annual yield = ((1 + r/n))^(nt) - 1. Here, r is the nominal interest rate, n is the number of compounding periods per year, and t is the investment duration. However, in the case of crypto assets, market volatility, liquidity risks, and smart contract risks also need to be taken into account.

There are three main scenarios where APY is generated in crypto investing:

The first is crypto lending. Platforms facilitate between lenders and borrowers, with lenders earning interest at an agreed APY. The second is yield farming, where assets are borrowed and further invested to aim for higher returns. While high yields are possible, caution is needed especially on new platforms due to higher risks. The third is staking, where crypto assets are locked into a blockchain network to earn rewards. APY tends to be higher on Proof of Stake networks.

In essence, APY is a metric to accurately evaluate the actual return on investment. Judging solely by APR can cause you to overlook the benefits of compounding.

However, note that APY is just an indicator of potential returns. It’s important to consider other factors such as market volatility, liquidity risks, and your personal risk tolerance. Each of lending, yield farming, and staking has its own pros and cons, so relying only on APY figures can be risky.

It’s wise to carefully assess the actual APY on platforms like Gate.io and tailor your investment strategy accordingly.