What are APY and APR?

Do you see two apps offering the same yield, but one says APR and the other APY? They aren’t showing you exactly the same thing. The difference lies in compounding: whether rewards are added to the original amount and start earning rewards of their own.

The Annual Percentage Rate (APR) calculates the return on the original capital, without compounding. The Annual Percentage Yield (APY) also factors in reinvestment. Think of a snowball: the bigger it gets, the more snow it can pick up on the next roll.

For example, with 100 tokens and a fixed 10% APR, one year’s rewards are 10 tokens without reinvestment. But if they are reinvested every six months, 5 tokens are added in the first half of the year. In the second half, the 5% is calculated on 105 tokens and yields 5.25. The final amount becomes 110.25 tokens, i.e. an APY of 10.25%, assuming a fixed rate and zero fees.

Why it matters

In decentralized finance (DeFi), both figures appear in staking, crypto lending and liquidity provision. On a loan, the APR may describe the cost of borrowing rather than the depositor’s return. That’s why we always check who is paying whom.

To compare two rates, you need to know whether they include compounding, how often it happens, and whether it requires action on your part. An APY figure doesn’t mean reinvestment happens automatically. Also, an annualized rate may be based on recent returns that won’t hold for the whole year.

What to watch out for

Yields often change, and transaction fees can eat into the effect of reinvesting. Also check which token the rewards are paid in: more tokens don’t necessarily mean more value in euros if their price falls.

We think a rate only means something together with where it comes from. Interest paid by borrowers is one thing; a protocol’s temporary rewards are another. No APY or APR guarantees your capital or, on its own, reflects risks such as a smart contract bug or impermanent loss in a liquidity pool.