You’ve probably seen DeFi protocols advertising yields of 50% APY or 100% APR. But what’s the difference? Understanding APY vs APR is crucial for comparing opportunities and knowing what you’ll actually earn. Let’s break it down.
The Quick Difference
- APR (Annual Percentage Rate) = Simple interest, no compounding
- APY (Annual Percentage Yield) = Compound interest included
APY is always higher than APR (assuming the same rate and any compounding). Why? Because with APY, you earn interest on your interest.
APR Explained
APR (Annual Percentage Rate) tells you the simple interest rate over one year, without accounting for compounding.
APR Example
You stake $1,000 at 50% APR for one year:
- Interest earned: $1,000 × 50% = $500
- End balance: $1,500
Simple. No compounding—you just earn 50% of your principal.
APY Explained
APY (Annual Percentage Yield) includes the effect of compounding—earning interest on previously earned interest. The more frequently you compound, the higher your effective yield.
APY Example (Daily Compounding)
You stake $1,000 at 50% APR, compounded daily for one year:
- Daily rate: 50% ÷ 365 = 0.137% per day
- After 365 days of compounding: $1,000 × (1.00137)^365 = $1,648.66
- Effective APY: 64.87%
Same 50% APR, but daily compounding turns it into 64.87% APY!
The Math: Converting APR to APY
APY = (1 + APR/n)^n – 1
Where n = number of compounding periods per year
Compounding Frequency Comparison
Starting with 50% APR:
| Compounding | Periods (n) | Resulting APY |
|---|---|---|
| Yearly | 1 | 50.00% |
| Quarterly | 4 | 60.18% |
| Monthly | 12 | 63.21% |
| Weekly | 52 | 64.48% |
| Daily | 365 | 64.82% |
| Continuous | ∞ | 64.87% |
Try It: APY/APR Calculator
Use our calculator to convert between APR and APY, and see how compounding frequency affects your earnings.
APY / APR Converter
Convert between APY (compounded) and APR (simple), and see your potential earnings.
Why This Matters in DeFi
1. Comparing Protocols
Some protocols show APR, others show APY. To compare fairly, convert everything to the same metric.
Example:
- Protocol A: 100% APY
- Protocol B: 80% APR (daily compounding)
Protocol B’s 80% APR with daily compounding = 122.7% APY. Protocol B is actually better!
2. Auto-Compounding Vaults
Yield aggregators like Yearn or Beefy auto-compound your rewards. They take a base APR and turn it into a higher APY by reinvesting for you. The more frequently they compound, the higher your effective yield.
3. Gas Costs and Compounding
On Ethereum mainnet, compounding costs gas. If your position is small, daily compounding might not make sense—the gas fees could eat your gains. Consider:
- Using auto-compounding vaults (they socialize gas costs)
- Compounding less frequently on small positions
- Using L2s where gas is cheaper
Watch Out: APY Manipulation
Some protocols display misleadingly high APYs. Red flags include:
- Unrealistic compounding assumptions — Showing APY with “per-block” compounding that nobody actually does
- Unsustainable token emissions — High APY paid in worthless governance tokens
- 7-day APY projections — One good week annualized to look amazing
- Not accounting for IL — Gross APY without impermanent loss factored in
Questions to Ask
- Is this APR or APY?
- How often is compounding assumed?
- What’s the reward token, and is it sustainable?
- Does this include impermanent loss?
- What are gas costs for claiming/compounding?
Real vs. Advertised Yields
Your actual yield is often lower than advertised. Here’s what eats into returns:
| Factor | Impact |
|---|---|
| Gas fees | Fixed cost per transaction |
| Impermanent loss | 0-25%+ depending on price movement |
| Token price decline | Rewards worth less over time |
| Deposit/withdrawal fees | Protocol-specific |
| Slippage | Especially on low-liquidity pools |
Key Takeaways
- APR = simple interest, APY = compound interest
- APY is always ≥ APR (they’re equal only with no compounding)
- More frequent compounding = higher APY
- Always convert to the same metric when comparing opportunities
- Auto-compounding vaults save gas and maximize yield
- Be skeptical of extremely high APYs—understand the source
- Factor in gas, IL, and token depreciation for real returns
Next step: Learn how to calculate your total yield farming returns with our Yield Farming ROI Calculator.