I recently noticed that many people get a bit confused about APR and APY when staking or choosing DeFi products. Honestly, these two terms look similar, but the logic behind them is actually quite different—and this difference can directly affect how much you ultimately earn.

Let’s start with APR. Annual percentage rate is that simple: it’s the percentage of interest you can earn within a year. But there’s a key point here—it doesn’t take compounding into account. Suppose you deposit $10,000 into a platform that offers 20% APR. After one year, you earn $2,000, and your account becomes $12,000. In the second year, you still earn $2,000, because interest is always calculated only on the original principal and doesn’t compound. This makes it straightforward to understand, but it’s also exactly where its limitation lies.

Then there’s APY. This metric accounts for the power of compounding—meaning you don’t just earn interest on your principal, you also earn interest on your interest. With the same 20% annual rate, if it’s compounded monthly, the interest is added each month, so the next month’s interest is generated based on a larger principal. As a result, over the course of a year, you might end up with $12,194 instead of $12,000. If it’s compounded daily, the number looks even better—closer to $12,213. The more frequently interest is compounded, the higher your final return, and this effect is especially noticeable for long-term investing.

So why is APY usually higher than APR? Because of compounding. A 20% APR, when compounded monthly, is roughly equivalent to a 21.94% APY; with daily compounding, it’s about 22.13%. The interest rate itself doesn’t change, but increasing the compounding frequency increases your actual earnings.

When choosing crypto and DeFi platforms, this difference is particularly important. Some platforms promote APR, while others promote APY—comparing them directly can be misleading. A product that looks like it has a higher APY isn’t necessarily more worthwhile than one with a lower APR unless you convert both to the same basis for comparison. Also, pay attention to the compounding frequency: both may offer 20% APR, but if one compounds daily and the other compounds monthly, the actual returns will be meaningfully different.

There’s another point to watch out for in the crypto space. Here, APY usually refers to token rewards, not fiat value. This is crucial because token prices are highly volatile. You might receive token rewards with a high APY, but if the token’s market price falls, your investment measured in fiat terms could shrink instead. So when choosing staking or lending products, make sure you clearly understand what the APY specifically refers to and where the risks lie.

In short: APR is the base annual interest rate, while APY is the real yield after compounding. The longer the time horizon and the more frequently compounding happens, the larger the gap between the two. Next time you evaluate any savings, staking, or DeFi opportunity, take a moment to convert both metrics to the same basis—it will help you make a clearer decision. In finance, the most common mistake is often failing to understand these seemingly minor differences.