Understanding APR and APY in DeFi and Crypto
![](data:image/svg+xml;utf-8,<svg xmlns="http://www.w3.org/2000/svg" width="1080" height="407" />)
APY and APR are two terms commonly encountered in decentralized finance (DeFi) products. The main difference between APY (annual percentage yield) and APR (annual percentage rate) lies in the consideration of compound interest.
APR represents the interest rate earned or paid over one year without compounding. For example, if you have $10,000 in a savings account with a 20% APR, you would earn $2,000 in interest after one year, resulting in a total of $12,000.
On the other hand, APY incorporates compound interest, meaning that the interest is earned on the previous interest. This can significantly affect the returns over time. For instance, if the same $10,000 deposit with a 20% APR is compounded monthly, the APY would be approximately 21.94%, resulting in a total of $12,194 after one year. With daily compounding, the APY would be around 22.13%, leading to a total of $12,213.
APY is a more dynamic metric that changes based on the frequency of compounding, while APR remains a fixed yearly rate. It's important to note that the interest earned varies according to the compounding frequency, with more frequent compounding yielding higher interest.
When comparing interest rates, it's crucial to use the same term for comparison. This is particularly relevant in DeFi and crypto products, where APR and APY may be used. To accurately compare different products, convert the rates to the same metric. Additionally, consider the compounding periods to ensure an accurate assessment of the potential interest earned.
Furthermore, when dealing with crypto products, it's essential to understand the context of APY. In some cases, APY may refer to the rewards earned in cryptocurrency rather than the actual or predicted returns in fiat currency. Given the volatility of crypto asset prices, the value of your investment may fluctuate. Review the product terms and conditions carefully to understand the risks involved and the specific meaning of APY in that context.
In summary, APY incorporates compound interest and is a more complex metric compared to APR. When calculating interest, always verify which rate you are considering to accurately determine the potential returns.
23 comments