APY vs APR in the crypto industry: Which one to choose? You need to understand the differences first

When entering the world of crypto investing, two words—APR and APY—often confuse beginners. Both terms relate to returns, but their mechanisms differ entirely. Misunderstanding these can cause you to miss out on good profit opportunities or incur higher costs.

What is the main difference between APY and APR?

APR (Annual Percentage Rate) is a simple interest rate calculated only on the principal, without considering compounding interest. Meanwhile, APY (Annual Percentage Yield) reflects the actual return because it includes the effects of compounding interest. This means that APY usually shows a higher number than APR for the same interest rate.

This difference is especially important in the crypto space, where compounding can occur daily or even hourly.

APR in crypto: meaning and usage

APR in the context of digital assets refers to the total interest earned from staking or lending tokens over a year.

For example, if you deposit 10 Bitcoin (BTC) into a lending pool with an APR of 6% and lock it for 1 year, you will earn 0.6 BTC in addition to your principal. After one year, your total will be 10.6 BTC.

The advantage of APR in crypto is no hidden fees. Interest is calculated solely on the amount deposited, unlike traditional finance systems that may include various fees.

There are 2 types of APR:

Fixed APR (Fixed): The interest rate remains unchanged throughout the contract period, allowing investors to predict their income clearly.

Variable APR (Variable): The interest rate fluctuates based on market conditions and platform policies. If the market is volatile, APY can increase or decrease.

APY in crypto: the power of compounding interest

APY accounts for the effect of compounding interest, meaning you earn interest on previously earned interest.

Returning to the same example, if you invest 10 BTC at an APR of 6%, but calculate APY with daily compounding, the actual return in the first year would be 6.18%, giving you 0.618 BTC instead of just 0.6 BTC.

The difference may seem small, but over longer periods, this gap widens significantly. Consider this:

More frequent compounding increases returns:

• Semi-annual compounding: 6.09% APY
• Quarterly compounding: 6.14% APY
• Monthly compounding: 6.17% APY
• Daily compounding: 6.18% APY

How to calculate APR and APY

Calculation formula for APR

APR uses the simplest basic formula:

APR = P × T

where:

• P = periodic interest rate (e.g., monthly)
• T = time period (in years)

Example: If the monthly interest rate is 0.5%, then APR = 0.5% × 12 months = 6%.

Calculation formula for APY

APY uses a formula that accounts for compounding:

APY = ((1 + r/n)^n - 1)

where:

• r = periodic interest rate expressed as a decimal (e.g., 0.06 for 6%)
• n = number of compounding periods per year

For example, with a 6% rate compounded daily: APY = ((1 + 0.06/365)^365 - 1) ≈ 0.0618 or 6.18%

Applying APR and APY in the crypto industry

Staking: earning income from holding tokens

Staking involves depositing your tokens on a blockchain to support transaction validation (Proof-of-Stake) and earning interest as rewards.

For example, staking Ethereum (ETH) with an APR of 4% on a DeFi platform will give you annual interest. Some platforms also allow daily accrual, meaning you’re effectively earning a higher APY than APR.

Yield Farming: providing liquidity and earning rewards

Yield Farming is a passive investment activity where you deposit tokens into a liquidity pool on a DeFi protocol to support the platform, earning APR or APY as rewards.

APY in yield farming is often higher than in staking but comes with increased risks, such as slippage (slippage) or protocol vulnerabilities.

Who benefits more from APY vs. APR?

For investors: APY offers better returns because compounding accelerates growth. For example, with 10,000 units at an APY of 5% compounded daily over 3 years, you’d earn approximately 1,576.25 units in interest.

For borrowers: APR is preferable because it’s usually lower, meaning less interest paid.

In crypto: Since interest rates tend to be higher than traditional markets, investors should pay attention to APY and the associated risks. High returns ≠ risk-free.

Real-world comparison example of APR and APY

Scenario: You invest 100,000 units at 5% per year.

If only considering APR:

• Year 1: earn 5,000 units → total 105,000
• Year 2: earn 5,000 units → total 110,000
• Year 3: earn 5,000 units → total 115,000

If considering APY (monthly compounding ≈ 5.12%):

• Year 1: earn 5,120 units → total 105,120
• Year 2: earn 5,252 units → total 110,372
• Year 3: earn 5,388 units → total 115,760

The difference over 3 years is about 760 units, but over longer periods, the advantage of APY becomes more significant.

Warning: high interest rates = high risk

In crypto, interest rates (APR or APY) over 10% per year should raise caution. Always verify:

• Platform credibility
• Protocol risks
• Token price volatility

Choosing between APR and APY depends on your investment goals, but the key is to understand clearly to avoid falling prey to seemingly attractive but risky rates.