APY and APR are everywhere in crypto. “Earn 12% APY on USDC.” “20% APR on your ETH.”
They look similar but are very different. Using the wrong one can make you misjudge your returns by a lot.
The Simple Difference
| Term | Meaning | Includes Compounding? |
|---|---|---|
| APR | Annual Percentage Rate | No |
| APY | Annual Percentage Yield | Yes |
APR is simple interest. If you earn 12% APR, you get 12% of your deposit per year.
APY includes compounding. If you earn 12% APY, your interest earns interest — you get more than 12% of your initial deposit.
APR (Simple Interest)
APR = annual rate without compounding.
Example:
- You deposit $10,000 at 12% APR
- Interest is paid monthly: 1% per month ($100)
- After Month 1: $10,100
- After Month 2: $10,200 (you earn 1% of $10,100 = $101, but APR ignores this)
- After 12 months: You’ve earned $1,200 ($10,000 × 12%)
- Total: $11,200
APR is always lower than APY for the same stated rate (if compounding occurs).
APY (Compound Interest)
APY includes the effect of compounding — interest earned on interest.
Example:
- You deposit $10,000 at 12% APY
- Interest is compounded monthly
- Month 1: $10,000 + $100 = $10,100
- Month 2: $10,100 + $101 = $10,201
- Month 12: $11,268 (vs $11,200 with APR)
- Total: $11,268
The extra $68 comes from compounding. The more frequently interest compounds, the bigger the gap.
Why Crypto Uses APY
Most DeFi protocols show APY because:
- Interest is often paid continuously (every block, every second)
- APY gives a more accurate picture of actual returns
- It’s the standard in the industry
Staking rewards, lending yields, and farm returns are almost always quoted as APY.
Converting Between APR and APY
APR → APY (monthly compounding):
APY = (1 + APR ÷ n)^n - 1
where n = number of compounding periods per year
Example: 12% APR with monthly compounding
- APY = (1 + 0.12 ÷ 12)^12 - 1
- APY = (1.01)^12 - 1
- APY = 1.1268 - 1 = 0.1268 = 12.68%
Quick Reference Table
| Stated Rate | APR | APY (daily) | APY (monthly) |
|---|---|---|---|
| 5% | 5.00% | 5.13% | 5.12% |
| 10% | 10.00% | 10.52% | 10.47% |
| 15% | 15.00% | 16.18% | 16.08% |
| 20% | 20.00% | 22.13% | 21.94% |
The gap grows with higher rates and more frequent compounding.
Common Crypto Scenarios
Stablecoin Lending (Aave, Compound)
- They quote APY (including compounding)
- Typical: 5-12% APY on USDC
- Interest accrues every second (Ethereum block time ~12 seconds)
Staking (ETH, SOL, DOT)
- Quoted as APY
- Rewards are distributed per epoch (hours or days)
- Compounding happens when you re-stake rewards
Yield Farming
- Almost always APY
- Some farms quote inflated APYs that include token price speculation
- A 1,000% APY farm might only give you 50% real returns if the reward token crashes
What to Watch Out For
1. “APY” That Includes Token Price
Some protocols quote APY that assumes the reward token’s price stays constant. If the token drops 50%, your real APY drops by 50%.
Example:
- Farm says 200% APY paid in FARM token
- FARM token drops 75% over the year
- Your real return: 200% × 25% = 50% (before IL and fees)
2. Compounding Frequency
Daily compounding earns more than monthly compounding. For the same stated APY:
- Daily compounding: maximum effect
- Weekly: slightly less
- Monthly: significantly less
Always check: Does the protocol auto-compound, or do you need to manually compound?
3. Fixed vs Variable Rates
- Fixed: Rate stays the same (rare in DeFi)
- Variable: Rate changes based on supply and demand (common)
- The quoted APY is the current rate, not a guarantee
Which Matters for You?
If You’re Earning Interest
Look at APY — it’s the actual return you’ll get. APR understates your earnings.
If You’re Borrowing
Look at APR — it’s the actual cost. APY overstates what you pay (borrowers usually don’t compound their debt).
If You’re Comparing
Always convert everything to APY so you’re comparing apples to apples.
Verdict
APY = what you earn (includes compounding). APR = simple rate (no compounding).
In crypto, most returns are quoted as APY. This is the number that matters for comparing earning opportunities.
If you see APR, convert it to APY to understand your real return. The difference is small for low rates (5% APR = 5.12% APY monthly) but significant for high rates (100% APR = 161% APY daily).
Related: How to Earn Interest on Crypto | 10 Ways to Earn Passive Income | Crypto Yield Farming Guide | How Much Can You Earn from Staking?
How to apply this in practice
Knowing the difference between APR and APY is only useful if you act on it. When a DeFi protocol advertises “20% APY,” ask whether that figure includes compounding of reward tokens or only the base lending rate. If you are comparing a stablecoin lending pool on Aave (quoted as APY with continuous compounding) against a staking reward on a Solana validator (quoted as APR before re-staking), convert both to APY so you are measuring the same thing.
A quick mental shortcut: for rates under 10%, the APR-to-APY gap is small — a 5% APR compounded monthly is only 5.12% APY. Once you get above 20%, the gap widens noticeably. A 50% APR compounded daily works out to roughly 64.7% APY. That is not a rounding error — it is the difference between understanding your real return and being surprised when your balance grows slower than expected.
If you are borrowing, flip the lens. Borrowing costs on Aave and Morpho are quoted as variable APR. A 6% APR borrow rate means you will owe roughly 6% per year on the amount you borrowed, regardless of compounding, because most borrowers repay before interest compounds significantly. Focus on APR for borrowing decisions and APY for earning decisions.
What to watch for beyond the headline number
A headline APY can be misleading in several ways. Reward token inflation is the most common trap: a yield farming pool advertising 500% APY may be paying you in a token with unlimited supply. If that token drops 90% over the year, your real return is a fraction of what was advertised. Always check whether the yield comes from organic fees (trading fees, borrowing interest) or from newly minted reward tokens.
Compounding frequency matters more than most beginners realise. The same nominal rate compounds differently depending on whether it is calculated continuously (as in most Ethereum lending protocols), daily, weekly, or monthly. A protocol that auto-compounds your position will deliver a higher effective yield than one where you must manually harvest and re-stake rewards, even if the headline rates look identical.
Fixed versus variable rates also change the picture. Almost all DeFi rates are variable. The 8% APY you see on USDC today could drop to 3% next week if utilization falls. If you need predictable income, look for protocols that offer a stable rate option (Aave allows you to lock in a fixed rate on some assets), or accept the variability and adjust your expectations quarterly.
Related: How to Earn Interest on Crypto | 10 Ways to Earn Passive Income | Crypto Yield Farming Guide | How Much Can You Earn from Staking?