If you’re new to DeFi and staking, you’ve probably seen the terms APY and APR many times. However, to be honest, many people may still be unclear about what these two actually mean and why the distinction is important.

First, let’s understand what APR is. APR stands for annual percentage rate, and it represents a fixed interest rate that does not take compounding into account. Simply put, if you deposit $1,000 into a product with a 10% APR, you’ll earn $100 in profit after one year. But here’s the catch: since APR is calculated without compounding, even as time passes, that interest does not generate additional interest. In the world of cryptocurrency, APR is commonly used in lending protocols and loan products that do not automatically compound.

By contrast, APY—annual percentage yield—shows the actual return including compounding. Unlike APR, APY incorporates the “compound interest effect,” meaning that interest earns interest. If you deposit the same $1,000 at 10% APY with daily compounding, the interest will increase at an accelerating pace over the year, resulting in earnings that are slightly over $100.

In the crypto space, especially in DeFi and staking pools, the power of compounding is particularly strong. Some protocols calculate compounding daily, and in some cases every few hours. That’s why choosing to view returns as APY gives you a more accurate understanding of the earnings you can actually receive.

In short, APR is a fixed interest rate without compounding, while APY is a realistic return that includes compounding.

This is important because it allows you to judge more accurately how much you can actually earn when you put funds into DeFi platforms or stake crypto assets. If the protocol compounds every day, then looking at APY will be closer to the real return. On the other hand, if you’re considering products or loans that do not compound, it’s sufficient to understand what APR is and make your decision based on APR.

If you’re aiming for large returns through compounding, you should look for investments that offer APY. Conversely, if you’re looking at simple-interest products, using APR helps you form a clear expectation of earnings without any additional calculations.

As a common question, you may wonder whether APY changes over time. In cryptocurrency, rates frequently fluctuate due to protocol policies and market demand. Therefore, it’s important to always check whether the rate is fixed or variable.

The reason APY is higher than APR is that it includes the effect of compounding. Especially the more frequently compounding is calculated, the wider the difference becomes.

Many DeFi platforms and staking programs provide APY for assets such as ETH, BTC, and stablecoins. When deciding where to deposit your assets, if you understand these differences, you’ll be able to make smarter investment decisions.

Disclaimer: This post is for information only and does not constitute financial advice. Before making any investment decision, be sure to do your own research and consult a professional.