APY and APR in cryptocurrency: the difference, calculation, and practical application

Two rates of 10% per year can yield different returns, and the difference can sometimes become hundreds of dollars per position. It all comes down to the three letters before the percentage. APR and APY are being used at every turn in the cryptocurrency space: exchanges advertise APY rates on DeFi platforms, lending services display APR on loans, and the numbers next to these abbreviations look similar, even though they mean different things. 

It’s important for investors to understand the difference between APR and APY, if only because platform marketers understand it perfectly well and always highlight whichever metric looks more attractive. So let’s break down what APR and APY are, provide the formulas, calculate examples using real numbers, and show where each metric is appropriate.

Why It’s important to understand APY and APR in crypto investing

Any investment is evaluated based on its return, and returns in crypto are almost always expressed using one of these two abbreviations. Understanding the difference between APR and APY saves you money in two ways. 

First, when choosing a platform: two platforms offering identical 10% rates may differ in actual returns if one uses APR and the other uses APY. Second, when taking out loans: when applying for a loan, it’s more beneficial to see the true cost of borrowing rather than a promotional figure. 

So the crypto space works the same way as the banking sector, and in the cryptocurrency environment, but the cost of a mistake is even higher. The rates are higher, interest is charged more frequently, and there are fewer mandatory disclosure standards. So you will have to do the math yourself. 

What is APR (Annual Percentage Rate)

APR (Annual Percentage Rate) is the annual interest rate excluding compound interest. APR represents the annual cost of money in a simple form: what percentage of the principal you will receive or pay over the course of a year if interest is not reinvested. This metric is also referred to as the annual interest rate or the simple rate.

APR is used in situations where accrued interest is not added to the principal: cryptocurrency-backed lending, margin loans on exchanges, and some lending protocols. Examples of APR usage are easy to find on any major platform: an exchange’s lending section almost always displays the simple annual rate, because the borrower pays interest separately and there is no compounding.

Calculating APR is straightforward; the formula is as follows: income = amount × rate × term / 365. Here’s how APR is calculated in practice: let’s take a loan of 100 USDT at 12% per annum for 30 days. The interest will be 100 × 0.12 × 30/365 = 0.99 USDT. This figure does not take anything else into account—neither the frequency of payments nor reinvestment.

The practical implication is simple: APR is suitable for evaluating the cost of loans and for comparing products without compounding. APR does not account for reinvestment, so for deposits and staking, it shows the lower limit of possible returns rather than the actual result.

What is APY (Annual Percentage Yield)

APY (Annual Percentage Yield) is the annual percentage yield—a rate that accounts for compound interest. The key feature of compounding is that interest is accrued not only on the principal amount but also on previously accrued interest, and each subsequent period operates on the already increased principal.

This is precisely why APY provides a more accurate picture of an investor’s actual return: it answers the question “how much will I actually earn in a year,” rather than “what is the product’s nominal rate?” To assess the returns on deposits, staking, and farming, this is the metric you need to focus on.

The APY formula is as follows: APY = (1 + r/n)^n − 1, where r is the nominal annual rate, and n is the number of interest compounding periods per year. Here’s a real-world example of APY calculation: invest 1 BTC at 5% per annum with daily compounding. The APY will be (1 + 0.05/365)^365 − 1 = 5.127%. At a Bitcoin price of $64,000, the position will generate $3,281 in income instead of $3,200 at a simple interest rate—an extra $81 comes from the magic of compounding.

The frequency of compounding makes a big difference. The final return depends directly on the interest rate and the compounding frequency. At a nominal 10%, annual compounding yields exactly 10%, monthly compounding yields 10.47%, and daily compounding yields 10.52%. 

The more frequently interest is added to the principal, the higher the effective yield, and then the frequency can impact a portfolio’s total return. Interest can be calculated daily or even per block—this is common in DeFi.

Example: the same 10% base rate, but different results. A $10,000 deposit with the same interest rate will yield an APR of exactly $1,000 per year. The same deposit with daily compounding generates $1,052.

However, APR and APY can only match in one scenario: when interest is compounded once a year. In all other cases, APY is usually higher for the same nominal rate, and the higher the rate and more frequent the compounding, the more noticeable the difference will be: with a 100% APR, daily compounding equates to a 171% APY.

This also answers a common question for beginners: why does the APR sometimes seem higher than the APY across different products? Platforms highlight the metric that is most favorable to them, so directly comparing figures with different abbreviations is a mistake.

It’s essential to distinguish between APR and APY before depositing funds, and for a fair comparison, both values should be converted to the same format.

Where APR and APY are used in cryptocurrencies

Staking. Staking rewards on most networks are technically set as a simple rate. However, if a validator or a platform automatically reinvests the payments, the actual return on investment becomes APY.

ETH staking via liquid protocols is a typical example: holders lock up their tokens, receive approximately 3% of the face value, and the automatic compound interest further increases the effective rate. In staking, the difference between the figures is small due to modest rates, but it exists.

DeFi and pools. APY predominates on DeFi platforms: yield farming, liquidity pools, auto-compounding aggregators, and many others. This is also where you’ll find the most fantastic figures, in the thousands of percent. Loans and lending. Lending protocols and exchange-based credit products use APR: the borrower sees the simple annual cost of the debt.

Exchange savings accounts. A hybrid case: products like exchange “earn” programs show APY because the returns are automatically compounded, and this is accurate: the investor will actually receive the stated amount. 

Calculation Examples

Converting APR to APY: effective rate = (1 + APR/n)^n − 1.

A 12% annual loan or deposit with monthly compounding gives an effective rate of (1 + 0.12/12)^12 − 1 = 12.68%. Reverse conversion: APR = n × ((1 + APY)^(1/n) − 1); from an APY of 12.68% with monthly compounding, we simply get a nominal annual rate of 12%.

Platform comparison. Platform A promises an 11% APR, while Platform B offers an 11.3% APY with daily compounding.

We simplify Platform A to its general form: (1 + 0.11/365)^365 − 1 = 11.63%. Surprisingly, the platform with the “lower” number turns out to be more profitable. This is exactly the kind of interest rate trick that investors who do their own calculations fall for.

Long-term horizon. $5,000 in stablecoins at 8% for three years.

Thus, with simple interest, the initial capital will reach $6,200; with daily compounding and reinvestment, it will reach $6,356. The annual increase in total return is modest, but the frequency of compounding always favors the total return on investment, which grows in each period.

Limitations and disclaimers

High APY figures in DeFi should be viewed with skepticism. Three- and four-digit APY rates almost always involve the issuance of a native token: returns are paid in tokens that experience inflation, and the real return in dollars can end up being negative. Check which asset the rewards are paid in and what happens to its price.

The displayed APY is a projection, not a guarantee. DeFi rates are constantly recalculated based on pool utilization, and today’s 40% could drop to 12% tomorrow. The metric reflects the current moment on an annualized scale, not a guarantee for the entire year.

However, keep in mind that these metrics do take risks into account: asset volatility, impermanent loss in pools, smart contract vulnerabilities, and network fees, which—even in small amounts—can erode the entire compound effect. When evaluating a product, investors can use APR and APY as tools to compare potential returns, but these figures do not account for risk. This material is for informational purposes only and does not constitute investment advice.

FAQ

Which is better: APY or APR?

Neither is “better,” as they answer different questions. APR is suitable for the cost of a loan, while APY is used for income with compounding. The only mistake is to compare them directly with each other. 

How do you convert APR to APY and vice versa?

APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year. Conversely: APR = n × ((1 + APY)^(1/n) − 1). Online calculators are sufficient for quick estimates, but it’s useful to know the formula to verify platform marketing claims.

Why does APR sometimes seem higher than APY?

Because different products are being compared. A product without compounding might have a high APR, while a similar product with compounding might have a lower APY—and unlike APR, the APY already factors in compounding. Convert both values to the same format, and you’ll get a fair picture.

Can you trust a high APY in DeFi?

With caution. Verify the source of the yield: pool fees are more stable, while token issuance is almost always temporary. Look at the rate history over months, not just a single day, and remember that only a calculation in dollars—taking into account the price of the reward token—provides a more accurate picture of the outcome.

To sum up: APR represents the annual simple interest rate and accurately reflects what you’ll pay; APY includes compounding and shows what you’ll actually earn. Keep the conversion formula in mind, compare only figures that have been standardized to the same format—and no platform will sell you 10% that actually turns out to be 9%.