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APR vs APY: finally understanding the difference for your crypto returns
When investing in cryptocurrencies , the first step is often to choose your initial assets. The second is to learn how to use a decentralized wallet to explore DeFi , interact with protocols, and access products offering returns. It is precisely at this point that you will encounter two ubiquitous metrics: APR and APY .
These two concepts seem similar, but they don't express the same financial reality. To put it simply: APR corresponds to a simple annual interest rate , while APY includes compound interest , meaning the regular reinvestment of earnings. At the same rate, APY is always higher than APR if rewards are automatically compounded.
We will start from concrete situations from staking and DeFi protocols to make the difference between APR and APY intuitive, even if you are a beginner in the web3 .
Table of contents
APR and APY: Clear definitions applied to DeFi
What is APR in decentralized finance?
The APR (Annual Percentage Rate) is a simple annual interest rate . It expresses the theoretical return over one year, without assuming that you reinvest your earnings. It is an indicator used for:
- staking programs where you have to manually claim your rewards;
- liquidity pools on certain AMMs (automated market maker );
- borrowing and lending lending protocols ;
- certain centralized crypto savings .
If a protocol advertises a 10% APR, this means that by leaving €1,000 of tokens without reinvesting them, the theoretical return is €100 over one year, excluding token price variation and fees.
What is APY in decentralized finance?
The APY (Annual Percentage Yield) represents an annual rate of return that takes into account compound interest . Here, it is assumed that the rewards are reinvested in the same position at regular intervals (e.g., hourly, daily, or weekly).
In concrete terms, the APY depends on two elements:
- the base rate (equivalent APR);
- compounding frequency (capitalization of interest).
In DeFi, some protocols automatically reinvest rewards for you (auto-compounding), which allows you to display a APY than the initial APR, without manual intervention.
APR, APY and using a web3 wallet: what to do if you are a beginner?
Not yet familiar with DeFi wallets? Start with the basics
To truly benefit from the returns shown in APR or APY in decentralized finance, you need to know how to use a Web3 wallet, interact with dApps, dApp understand how to sign a transaction on the blockchain. If you don't already have this knowledge, it's best to start with a clear educational framework.
To learn how to buy cryptocurrencies and decentralize your funds, we offer our free guide explaining how to do it, step by step, with supporting screenshots.
What you will learn:
- Buying your first cryptocurrencies on a centralized platform (the simplest method)
- Knowing the basics of French taxation and understanding what stablecoin
- Open a decentralized (DeFi) wallet – Learn how to manage your assets without intermediaries and interact directly with the blockchain.
- Conduct transactions via a decentralized wallet
- Explore decentralized finance (DeFi) – Discover advanced concepts like staking and NFTs.
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APR vs APY: Why APY is always higher at the same base rate
The compound interest mechanism applied to staking
The difference between APR and APY lies solely in the compounding of interest . With APR, your earnings are calculated on the initial capital. With APY, your future earnings are calculated on a capital that grows as rewards are added.
In practice, on a protocol that auto-compounds every hour, the annual rate of return displayed in APY corresponds to this almost continuous capitalization, which gives a higher total return than a simple 12-month APR.
Simple numerical example: same APR, different APY
stablecoin staking protocol displaying stablecoin 10% APR:
- With a 10% APR without reinvestment, €1,000 yields €1,100 after one year.
- If interest is compounded monthly, the APY is approximately 10.47%.
- With daily capitalization, the APY climbs slightly again.
The gap seems limited over one year, but becomes significant over several years or on very high crypto interest rates much greater protocol risk and market risk
Why do some platforms display the APR and others the APY?
CEX logic and DeFi protocols
In cryptocurrency investing , the presentation of returns is not neutral. Centralized platforms and DeFi protocols do not use APR and APY in the same way:
- CEXs often display an annual interest rate in APY to make the product more attractive, especially if the interest is paid and reinvested automatically;
- DEXs and liquidity pools often display an APR to reflect the trading fees generated and the share going to liquidity providers, without assuming any compounding strategy;
- Lending protocols ( Aave , Compound, etc.) sometimes separate APR on the borrower side and APY on the depositor side, to reflect the nature of the product.
To compare two yield opportunities, it is more relevant to convert everything to APY , as this is the closest indicator to what you will actually earn if your interest is reinvested.
Impact of automatic vs. manual compounding
If a protocol only displays an APR, it does not mean you cannot benefit from compound interest. You can:
- manually reinvest your rewards (which involves gas fees );
- use a DeFi aggregator that takes your APR position and converts it into an auto-compound strategy with a higher APY;
- choose a pool or equivalent product that natively offers auto-compounding .
staking portfolio management strategy , compounding frequency and transaction fees must be taken into account, as network fees can negate part of the gain from compound interest.
APR, APY and risk: what the displayed rate doesn't tell you
The rate does not take into account the volatility of the token.
A high APY or APR does not guarantee a positive real return in fiat currency. In DeFi, your rewards are often paid in the same native token as the protocol. If the price of this token drops sharply during the staking , the real return in euros can become low or even negative.
Typical example:
- APR of 50% paid in X token;
- The X token loses 60% of its value over the year;
- Your "return" in tokens is high, but the total value in euros may be less than your initial investment.
In a decentralized finance , it is therefore necessary to combine the analysis of APR/APY with that of price risk , market liquidity , trading volume and protocol robustness .
APR and APY do not reflect protocol risk or smart contract risk
A protocol displaying 200% APY should not be interpreted as a "good deal." It's a strong signal that the risk level is very high, often linked to token incentives or an ultra-speculative market.
APR vs APY: How to compare two crypto yield offers
Concrete steps to analyze an opportunity
When you are hesitating between two products (for example, a liquidity pool with APR and staking with APY), you can follow a simple approach:
- Identify whether the yield is displayed in APR or APY .
- If necessary, convert the APR to an approximate APY according to the compounding frequency you are considering.
- Check the nature of the reward: native token , stablecoin , combination of several tokens.
- Analyze the historical volatility of the token (for example via price data over several months).
- Take into account gas costs and protocol fees related to deposit, withdrawal and compounding.
- Assess protocol risk: audits, seniority, TVL (total value locked), governance.
This approach allows the APR/APY indicator to be placed within a broader view of risk management in DeFi .
APR APY: How to remember the difference in one sentence
A simple reminder to avoid confusing APR and APY
Finally, a quick reference to remember the difference between APR and APY :
- APR : simple annual interest rate , without automatic capitalization.
- APY : annual rate of return which includes compound interest .
When evaluating a staking , lending , or DeFi pool, always ask yourself three questions: Is the return displayed in APR or APY, is the interest actually compounded, and what is the level of risk associated with the protocol and token used? With these considerations, APR and APY become useful tools, not just isolated marketing figures.
Investments in cryptocurrencies are risky. Crypternon could not be held responsible, directly or indirectly, for any damage or loss caused following the use of a property or service put forward in this article. Readers must do their own research before undertaking any action and investing only within the limits of their financial capacities. Past performance does not guarantee future results. This article does not constitute an investment advice.
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AMF recommendations. There is no guaranteed high yield, a product with high performance potential implies a high risk. This risk taking must be in line with your project, your investment horizon and your ability to lose part of this savings. Do not invest if you are not ready to lose all or part of your capital.
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Yoann
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
