APY vs APR in Crypto: What's the Difference?

APY and APR are everywhere in crypto. “Earn 12% APY on USDC.” “20% APR on your ETH.”

They look similar but are very different. Using the wrong one can make you misjudge your returns by a lot.

The Simple Difference

Term	Meaning	Includes Compounding?
APR	Annual Percentage Rate	No
APY	Annual Percentage Yield	Yes

APR is simple interest. If you earn 12% APR, you get 12% of your deposit per year.

APY includes compounding. If you earn 12% APY, your interest earns interest — you get more than 12% of your initial deposit.

APR (Simple Interest)

APR = annual rate without compounding.

Example:

You deposit $10,000 at 12% APR
Interest is paid monthly: 1% per month ($100)
After Month 1: $10,100
After Month 2: $10,200 (you earn 1% of $10,100 = $101, but APR ignores this)
After 12 months: You’ve earned $1,200 ($10,000 × 12%)
Total: $11,200

APR is always lower than APY for the same stated rate (if compounding occurs).

APY (Compound Interest)

APY includes the effect of compounding — interest earned on interest.

Example:

You deposit $10,000 at 12% APY
Interest is compounded monthly
Month 1: $10,000 + $100 = $10,100
Month 2: $10,100 + $101 = $10,201
Month 12: $11,268 (vs $11,200 with APR)
Total: $11,268

The extra $68 comes from compounding. The more frequently interest compounds, the bigger the gap.

Why Crypto Uses APY

Most DeFi protocols show APY because:

Interest is often paid continuously (every block, every second)
APY gives a more accurate picture of actual returns
It’s the standard in the industry

Staking rewards, lending yields, and farm returns are almost always quoted as APY.

Converting Between APR and APY

APR → APY (monthly compounding):

APY = (1 + APR ÷ n)^n - 1

where n = number of compounding periods per year

Example: 12% APR with monthly compounding

APY = (1 + 0.12 ÷ 12)^12 - 1
APY = (1.01)^12 - 1
APY = 1.1268 - 1 = 0.1268 = 12.68%

Quick Reference Table

Stated Rate	APR	APY (daily)	APY (monthly)
5%	5.00%	5.13%	5.12%
10%	10.00%	10.52%	10.47%
15%	15.00%	16.18%	16.08%
20%	20.00%	22.13%	21.94%

The gap grows with higher rates and more frequent compounding.

Common Crypto Scenarios

Stablecoin Lending (Aave, Compound)

They quote APY (including compounding)
Typical: 5-12% APY on USDC
Interest accrues every second (Ethereum block time ~12 seconds)

Staking (ETH, SOL, DOT)

Quoted as APY
Rewards are distributed per epoch (hours or days)
Compounding happens when you re-stake rewards

Yield Farming

Almost always APY
Some farms quote inflated APYs that include token price speculation
A 1,000% APY farm might only give you 50% real returns if the reward token crashes

What to Watch Out For

1. “APY” That Includes Token Price

Some protocols quote APY that assumes the reward token’s price stays constant. If the token drops 50%, your real APY drops by 50%.

Example:

Farm says 200% APY paid in FARM token
FARM token drops 75% over the year
Your real return: 200% × 25% = 50% (before IL and fees)

2. Compounding Frequency

Daily compounding earns more than monthly compounding. For the same stated APY:

Daily compounding: maximum effect
Weekly: slightly less
Monthly: significantly less

Always check: Does the protocol auto-compound, or do you need to manually compound?

3. Fixed vs Variable Rates

Fixed: Rate stays the same (rare in DeFi)
Variable: Rate changes based on supply and demand (common)
The quoted APY is the current rate, not a guarantee

Which Matters for You?

If You’re Earning Interest

Look at APY — it’s the actual return you’ll get. APR understates your earnings.

If You’re Borrowing

Look at APR — it’s the actual cost. APY overstates what you pay (borrowers usually don’t compound their debt).

If You’re Comparing

Always convert everything to APY so you’re comparing apples to apples.

Verdict

APY = what you earn (includes compounding). APR = simple rate (no compounding).

In crypto, most returns are quoted as APY. This is the number that matters for comparing earning opportunities.

If you see APR, convert it to APY to understand your real return. The difference is small for low rates (5% APR = 5.12% APY monthly) but significant for high rates (100% APR = 161% APY daily).