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APR vs APY: Finally understanding the difference for your cryptocurrency returns
When you're starting out with crypto investing, the first step is often choosing your initial assets. The second is learning how to use a decentralized wallet to explore DeFi , interact with protocols, and access products offering returns. It's precisely at this point that you'll encounter two ubiquitous metrics: APR and APY.
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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 .
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 );
- loans and borrowings loan/borrowing protocols ;
- certain centralized savings products .
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);
- the frequency of interest capitalization (often anglicized as compounding ).
In DeFi, some protocols automatically reinvest rewards for you, allowing you to see 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 Web3 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 dApp, and 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.
The free guide will walk you through your first steps, from buying your first cryptocurrencies to creating a software wallet and making a transaction on the blockchain. It is available by filling out the form below.
To delve deeper into these concepts, gain a thorough understanding of how the monetary system and Bitcoin work, and develop a more comprehensive grasp of the tools and legal constraints, we invite you to explore the BSM program .
It includes detailed video tutorials on centralized exchanges, software wallets, hardware wallets, and essential best practices. The program can be accessed via the header or the link above.
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.
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 at interest rates , frequent in some DeFi protocols (sometimes 10%, 15% or more, with obviously a much greater protocol risk and market risk
Why do some platforms display the APR and others the APY?
CEX logic and DeFi protocols
The presentation of yields 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;
- DEXs and liquidity pools often display an APR
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.
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 .
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 compound interest 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 deposits and withdrawals.
- 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 .
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Yoann
Trained as an engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future, I am participating in its democratization by developing Crypternon.