When you're involved in crypto investing, you'll come across the metric called APY many times, and it's really important. Whether you truly understand what APY is can significantly change your investment decisions.

Simply put, APY is the annual return rate that includes compound interest. In other words, it incorporates the magic of "interest on interest." On the other hand, APR is a straightforward annual percentage rate that does not consider compounding. Even if two investments show a 2% rate, with APY, the effect of compounding can make it effectively 3%. This difference can make a big impact in long-term investing.

The formula is (1 + r/n)^(nt) - 1, where r is the nominal interest rate, n is the number of compounding periods, and t is the time period. However, in crypto, you also need to account for market volatility and smart contract risks.

In actual investing, there are three ways to earn that differ from APY. Lending on lending platforms, providing liquidity through yield farming, and participating in staking to join the network. Each has very different risks and returns. Yield farming on new platforms often offers high APYs, but the risks are also substantial.

APY essentially quantifies the "power of compounding." Therefore, it’s dangerous to judge solely based on APR. You need to consider market volatility and liquidity risks and make a comprehensive assessment.

Even major platforms like Gate properly display APY information for staking and yield farming. As an investor, understanding what APY truly means and using it as a basis for your decisions is the smart way to invest in crypto.