Recently, someone asked me what annual interest rate is, and I found that many people actually confuse the concepts of APR and APY. In fact, the difference between these two is quite significant, especially because it directly impacts our investment returns.

Let's start with APY, which I think is more important. APY is the annual percentage yield; it takes into account the effect of compounding interest. Simply put, your money not only earns interest on the principal, but the earned interest can also generate more interest. Bank deposits, funds, and even the popular crypto asset staking all use APY. Due to the power of compounding, APY is usually higher than the other indicator and more accurately reflects how your assets grow.

What about APR? This is the annual percentage rate, which calculates interest only on the principal, without compounding. Credit cards, consumer loans, and mortgages typically display APR. It seems simpler and more straightforward, but the problem is that it doesn't consider compounding, so the actual returns or costs might be underestimated.

The key difference is this: APR is a simple interest rate, while APY is a compound interest rate. When you look at investment products or loans, you must clearly understand what the annual interest rate means. The same number, if one is APR and the other is APY, can result in very different actual returns.

Especially in the crypto space, staking, mining, and liquidity mining products are usually expressed with APY because the interest is compounded periodically. So next time you see a yield, make sure to check whether it's APR or APY, so you can accurately assess the actual return.