APY and APR

APR is a yearly rate without compounding, while APY is the yearly return including reinvested earnings. For the same rate, APY is always equal to or higher than APR.

How it works

APR (annual percentage rate) is simple interest: 12% APR on $1,000 is $120 a year if you never add the earnings back. APY (annual percentage yield) assumes the interest you earn also starts earning interest once reinvested.

The gap depends on how often interest compounds. 12% APR compounded monthly is about 12.68% APY, daily about 12.75%. At high rates the gap is huge: 100% APR compounded daily is roughly 171% APY.

Crypto projects often show whichever number looks bigger. APY assumes the rate stays the same all year and that you reinvest for free. In reality rates float, and gas for each reinvestment eats into the gain.

Example with numbers

You deposit $1,000 at 12% APR. Without reinvesting you have $1,120 after a year. If interest is added monthly, you have $1,000 × 1.01^12 ≈ $1,126.80, which is 12.68% APY.

Common mistake

A common mistake is comparing one product's APR with another's APY and assuming the rate is fixed. Convert both to the same measure, check which coin the yield is paid in, and ask whether the rate can change tomorrow. Yield paid in a falling token can lose money in dollars at any APY.

Questions and answers

What is the difference between APY and APR in simple terms?

APR is simple yearly interest. APY includes the effect of earnings being reinvested and earning more.

Which is better, 10% APY or 10% APR?

At the same number, 10% APY is less than 10% APR with frequent compounding. 10% APR compounded daily works out to about 10.5% APY.

Is the APY shown guaranteed?

In DeFi almost never. It depends on demand, rewards and token price and can change a lot at any moment.

APY and APR

How it works

Questions and answers

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