I've noticed that many people confuse APY and APR when looking at crypto products. Let's clarify what the real difference is and why it matters for your earnings.

Let's start simple. APR (Annual Percentage Rate) is just a fixed percentage you earn in a year. If you deposit $10,000 at an APR of 20%, you'll have $12,000 after a year. After two years, $14,000. Straightforward and easy to understand. No complications.

But here’s where it gets interesting. In DeFi and crypto products, you often see APY — Annual Percentage Yield. APY is not just a percentage; it accounts for compounding. That means interest is earned on interest.

To understand how it works, imagine: you deposit the same $10,000 at 20% annual interest, but interest is compounded monthly. At the end of the first month, you earn some interest, which gets added to the principal. In the second month, you earn interest on the increased amount. And so on, every month. By the end of the year, you will have earned not $2,000, but $2,429. The difference of $429 is simply because interest was compounded more frequently.

What if interest is compounded daily? Then, over a year, you'd get $2,452. See how the income grows? Over three years, with daily compounding at the same 20% rate, your balance would be $19,309 instead of $16,000 with simple interest. An increase of $3,309 just from compounding.

That’s why APY is a more advantageous metric for investors. The same 20% rate becomes 21.94% APY with monthly compounding and 22.13% with daily compounding. The more frequently interest is compounded, the higher the final APY.

When comparing crypto products, don’t just fall for a higher APR. Pay attention to APY and how often interest is compounded. A product with 15% APY and daily compounding could be more profitable than one with 16% APR without compounding. Convert the figures if you know the compounding frequency, or use online calculators.

Another important point for crypto: when you see APY on a savings or staking product, make sure you understand what it refers to. Sometimes it means earning in the native cryptocurrency, not in fiat money. If the asset’s price drops, your dollar value could be lower than your initial investment, even if you’re earning APY in tokens. Always read the product terms carefully and do your own research.

In short: APR is the base rate, APY is the same but accounts for compounding. APY is always higher if interest is compounded more than once a year. Remember this difference, and you won’t overpay or miss out on gains when choosing crypto products.