Key Takeaways
APR (annual percentage rate) measures simple interest over one year, while APY (annual percentage yield) also accounts for
APR (annual percentage rate) measures simple interest over one year, while APY (annual percentage yield) also accounts for compound interest, making APY a more complete measure of potential returns.
When interest compounds, you earn interest on previously earned interest. This causes APY to be higher than APR for the same product when compounding occurs more than once per year.
The more frequently interest compounds, the higher the APY relative to the APR. Daily compounding produces a higher APY than monthly compounding at the same APR.
In crypto and DeFi, both terms appear frequently. Always confirm which metric is being quoted and whether the compounding period is specified before comparing products.
When comparing two products, convert both figures to the same metric (either APR or APY) to make a fair comparison.
Introduction
If you have explored savings accounts, crypto lending platforms, or decentralized finance (DeFi) products, you have likely seen the terms APR and APY. They look similar and both describe how much you can earn or owe on a sum of money over time, but they measure different things.
Understanding the difference helps you compare products accurately. A product advertising 20% APY is not the same as one offering 20% APR, even though both figures look identical at first glance.
APR and APY Explained
APR, or annual percentage rate, describes the simple interest earned or paid on a principal amount over one year, without factoring in compounding. If you deposit $10,000 into an account with a 20% APR, you receive $2,000 in interest after 12 months. In year two, you earn another $2,000 on the original $10,000, and so on. The interest is calculated on the initial principal each time.
APY, or annual percentage yield, incorporates compounding. Compounding means that interest earned is added to your balance, and future interest is calculated on the new, larger total. This creates a snowball effect where your balance grows faster over time compared to simple interest.
Consider a $10,000 deposit at 20% APR with monthly compounding. Instead of receiving all $2,000 at year end, a portion of interest is added each month. Each month, you earn interest on a slightly larger balance. At the end of the year, you end up with approximately $12,194. That is $194 more than with simple interest, purely from compounding.
With daily compounding at the same 20% APR, your balance reaches around $12,213. The difference between monthly and daily compounding is small over one year, but becomes more significant over longer periods.
How APR and APY Relate
Because APY reflects compounding, it is always equal to or higher than APR when compounding occurs more than once a year. The more frequent the compounding, the wider the gap. A 20% APR with monthly compounding equals roughly 21.94% APY. With daily compounding, the same 20% APR equals approximately 22.13% APY.
A simple memory aid: "yield" in APY represents the more complex concept and the higher number. "Rate" in APR is the simpler, static figure.
Comparing Rates on Crypto Products
The same APR vs. APY distinction applies to crypto products such as yield farming, staking, and crypto lending. Platforms may advertise either metric, so it is important to identify which one is shown before comparing products.
If two DeFi products both display APY, also check the compounding period. If they have the same APR but one compounds daily and the other monthly, the daily-compounding product will deliver a slightly higher effective return.
Newer DeFi categories have made this distinction even more relevant. Restaking protocols (such as EigenLayer) and liquid staking derivatives often display APR for staking rewards, but the effective yield may differ when rewards are auto-compounded or when the staked derivative itself accrues value. When evaluating these products, check whether the displayed rate accounts for all layers of yield.
Providing liquidity to liquidity pools is another context where APR and APY matter. Pool returns may be advertised as APY with daily compounding, but the actual return depends on whether you manually compound your rewards or the protocol does it automatically.
One additional nuance applies to crypto products: some platforms use the term "APY" to refer to rewards paid in cryptocurrency, not fiat. Because crypto asset prices can be volatile, the fiat value of those rewards may be higher or lower than expected.
A product offering 50% APY in a specific token may look attractive, but if that token's price falls sharply, the fiat value of your total holding could still be lower than your original investment.
Since 2024, U.S. and international regulators have increased scrutiny on how crypto platforms advertise yields. The SEC has taken action against several platforms for misleading APR and APY representations, particularly where platforms displayed high annualized rates without clearly disclosing the compounding assumptions, token inflation, or risks involved.
This makes it especially important to verify whether advertised rates are annualized, whether they account for compounding, and what asset the rewards are paid in.
Always review the specific terms of any product you are considering, and research the asset in which rewards are paid.
FAQ
What is the main difference between APR and APY?
APR (annual percentage rate) represents simple interest over one year. APY (annual percentage yield) accounts for compounding, meaning interest is periodically added to the principal, and future interest is calculated on the new total. APY is always equal to or higher than APR when compounding occurs more than once per year.
Why does compounding frequency matter?
The more often interest compounds, the more you earn. Daily compounding adds interest to your balance 365 times a year, while monthly compounding does so 12 times. Each additional compounding event means more interest is earned on a slightly larger base, producing a higher effective annual yield.
How do I compare a product showing APR with one showing APY?
You need to convert both to the same metric. If you know the compounding frequency, you can convert APR to APY using the formula: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. Many online calculators can perform this conversion automatically.
Is a higher APY always better?
Not necessarily. A higher APY is attractive in isolation, but you should also consider the risk profile of the product, the compounding frequency, whether rewards are paid in volatile assets, and any lock-up or liquidity restrictions. Two products with the same APY may carry very different risk levels.
Why do some crypto platforms show APR and others show APY?
There is no universal standard for how crypto platforms display yields. Some show APR to present a simpler, more conservative figure, while others show APY to highlight the potential returns from compounding. Regulatory scrutiny has increased around this issue, but practices still vary. Always check which metric is displayed and whether the compounding frequency is stated before comparing products.
Closing Thoughts
APR and APY describe the same underlying concept, interest earned over time, but APY gives you a fuller picture by factoring in compounding. When evaluating any savings, lending, or DeFi product, check which metric is displayed and whether it accounts for compounding. Converting figures to the same metric before comparing products helps you make more informed decisions.
In crypto specifically, the lack of a universal standard for yield display, combined with regulatory scrutiny and the volatility of reward tokens, makes it especially important to read the fine print. A few minutes of verification can prevent costly misunderstandings.
Further Reading
Disclaimer: This content is presented to you on an "as is" basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal, or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the content is contributed by a third-party contributor, please note that those views expressed belong to the third-party contributor, and do not necessarily reflect those of Binance Academy. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. For more information, see our Terms of Use, Risk Warning, and Binance Academy Terms.