When exploring opportunities in decentralized finance (DeFi) like staking, lending, or yield farming, you'll frequently encounter the terms APR (Annual Percentage Rate) and APY (Annual Percentage Yield). While both measure potential returns on your crypto assets, they are not interchangeable.
What is APR?
APR stands for Annual Percentage Rate. It represents the annual rate of interest an investment earns without taking compounding into account. It's a simple interest rate calculated over a year.
For example, if you invest $1000 at an APR of 10%, you would earn $100 in interest over one year, assuming no compounding.
What is APY?
APY stands for Annual Percentage Yield. It represents the actual rate of return earned on an investment, taking into account the effect of compounding interest. Compounding means that you earn interest not only on your initial principal but also on the accumulated interest from previous periods.
Because APY includes compounding, it will typically be higher than the APR for the same investment if interest is compounded more than once a year.
The Key Difference: Compounding
The primary distinction between APR and APY is compounding. APR does not factor in compounding, while APY does. This means APY gives a more accurate picture of your potential earnings over time if your interest is reinvested or "compounded" regularly (e.g., daily, weekly, monthly).
When to Use Which?
- APR is often used for lending products where interest might be paid out periodically but not necessarily reinvested automatically. It's a simpler measure.
- APY is more common for savings accounts or staking protocols where rewards are frequently compounded, leading to a higher effective return.
When comparing different DeFi opportunities, always check whether the advertised rate is APR or APY. If it's APR, you might be able to achieve a higher APY by manually compounding your returns, if the platform allows.
Our upcoming APY/APR calculator will help you easily convert between these rates and understand the impact of different compounding frequencies.