Last Updated on 2 weeks by Ameer Hamza
Since the inception of blockchain, the use cases of the technology have expanded—one of such use cases is finance. Blockchain technology, specifically cryptocurrencies, has provided an accessible financial system for more people. These financial use cases include investment and loans.
Essentially, blockchain enables a financial system where users can safely borrow funds. It also provides services that allow long-term investment. These long-term investments utilize APY as a medium of measurement. If you have ever wondered about the meaning of APY and how it works, the answer is right here.
What is APY?
Users in the traditional financial system can leave their money in banks for a fixed period. The banks use these funds to provide loans to other people, and the owners of the funds are rewarded with a payment. This payment is called interest.
A similar financial service has been launched through crypto. Users can deposit their crypto funds as loans for others. In exchange, they are given an interest. This interest is calculated by using the Annual Percentage Yield (APY). The APY is the total interest that will be gotten from an investment after a fixed period. As the name suggests, the interest is calculated annually.
How Does the APY Work?
The APY works like a regular savings account. You deposit your cryptocurrency for a period in exchange for a compounded interest. These forms of investments could range from seven days to one year. The percentage of interest earned on the investment is your APY. For example, if you deposit BTC worth $200 at a 5% APY, your total investment at the end of the year would be $210.
Generally, crypto investments have higher APYs than traditional investments. This is because crypto investment is generally riskier than other forms of investment. Also, the crypto-financial ecosystem is barely regulated. This is unsimilar to the traditional financial system, where regulators can implement measures to determine interest rates. You can access these APYs by using savings accounts like Gemini and Outlet Finance.
Difference Between APY and APR
The Annual Percentage Yield (APY) is different from the Annual Percentage Rate (APR). While the APY is used in lending, the APR is used in borrowing. As earlier stated, the APY is the rate of return attached to long-term crypto investment. On the other hand, the APR is the interest rate given to borrowers. This interest is added to the borrowed sum, and borrowers are expected to refund their debt with the initial borrowed sum and the interest payment calculated with the APR.
While the prospect of earning guaranteed interest on your crypto investment might be enticing, it is advisable to do your research before venturing into this form of investment. Many Ponzi schemes have flooded the crypto market with unbelievably high APYs. Thus, extra caution must be exercised before making investment decisions.