I just noticed something that many in crypto still don't understand. When you look for where to put your assets to generate returns, most only look at one number: the APY. But here’s the interesting part – that number can be quite misleading if you don’t understand what’s behind it.

The APY or Annual Percentage Yield is basically what you will earn in a year, but with a crucial detail: it already includes the effect of compound interest. That is, you not only earn on your initial investment, but also on the gains you reinvest. This cycle of 'interest on interest' is what amplifies returns over time.

Now, many people confuse APY with APR, and that’s where problems start. The APR is just the annualized interest rate without considering compounding. In numbers: if you see a 2% APR versus 3% APY, that 1% difference comes precisely from compounding. It sounds small, but over long-term investments, it’s quite noticeable.

The technical formula is APY = (1 + r/n)^(nt) - 1, where r is the nominal rate, n is the compounding frequency, and t is the time. But the reality is that in crypto, this gets complicated because of market volatility, liquidity risks, and smart contract risks that don’t appear in the formula.

Where you really see differences in APY is in three types of investment. First are cryptocurrency loans – platforms connect lenders with borrowers, and you receive interest at an agreed APY. Then there’s yield farming, which is more aggressive: moving your assets between different markets seeking the highest yield. APYs can be very high, but so are the risks, especially if you enter new platforms. And finally, staking, where you lock your crypto in a blockchain network for a set period and receive rewards. In proof-of-stake networks, the APY is generally more attractive.

The important thing is that although APY gives you a more complete view than APR – because it does account for compounding in such a dynamic market as crypto – it’s not the only factor. You also need to evaluate volatility, your risk tolerance, and how liquid you need your funds to be. APY is a valuable tool, but it’s only part of the analysis. If you don’t consider the full context, you might end up in an investment that looks profitable on paper but doesn’t actually fit your strategy.