If you’re just getting started with cryptocurrency or DeFi, you’ve probably seen the terms APY and APR everywhere. But in reality, surprisingly few people truly understand what the difference is between the two—or why it matters.

To put it simply, APR is a fixed interest rate that doesn’t account for compounding, while APY is the actual return that includes the effects of compounding. Understanding this difference can greatly influence your decisions when earning interest with crypto assets.

As for what APY is: it refers to the annual yield that incorporates compounding. For example, if you deposit $1,000 with a 10% APY compounded daily, the interest earns interest, so over the course of a year you end up with a total amount that’s a little over $100 in simple terms. In the DeFi world—on DeFi platforms and staking programs—APY is used very often, and in particular, in the cryptocurrency ecosystem where compounding happens frequently, this effect can be quite powerful.

On the other hand, APR (annual percentage rate) is an interest rate that does not take compounding into account. If you invest $1,000 at 10% APR, you’ll get exactly $100 at the end of the year. Because there’s no compounding, the amount won’t grow further over time. This APR is commonly used in certain DeFi lending protocols and loans.

So how do you use each one for real investment decisions? If you want to aim for higher returns through compounding, you should look for investments that offer APY. Meanwhile, if you’re considering loans or deposits that won’t compound, looking at the APR gives you a clear picture without any additional calculations.

When it comes to APY’s characteristics, in the world of cryptocurrency it fluctuates frequently. The rate changes based on protocol policies and market demand, so you need to check whether the rate is fixed or variable at all times. Also, APY is typically higher than APR because it reflects the benefits of compounding.

Where can you earn APY in crypto? Many DeFi platforms and staking programs. There are more and more projects offering APY on assets such as ETH, BTC, and stablecoins. Some major exchanges also provide similar Earn products, and an environment is taking shape where even beginners can access them easily.

That said, before making any investment decision, it’s strongly recommended that you do your own research and, if possible, consult a financial advisor. By understanding the difference between APY and APR, you should be able to make smarter decisions.