When you’re just starting out with cryptocurrencies, the words APY and APR come up very often. But honestly, I think surprisingly few people truly understand what these two terms mean. Today, I want to clarify the difference and share information that can help you make better investment decisions.

First, about APR. APR stands for annual percentage rate, which is a fixed interest rate that does not consider compounding. Simply put, if you invest $1,000 in a project with a 10% APR, you will earn $100 profit after one year. However, an important point is that APR does not account for compounding, so no additional interest is generated over time. In crypto, APR is often used in DeFi lending protocols and staking rewards.

On the other hand, APY is a completely different concept from APR. Unlike APR, APY reflects the actual annual yield including compounding. If you deposit $1,000 with a 10% APY that compounds daily, the snowball effect of earning interest on interest will result in a profit that exceeds $100 over the course of a year. Especially in the crypto world, some protocols calculate interest daily or even every few hours, making this difference very significant.

In simple terms, APR is the basic interest rate without compounding, while APY shows the actual return including compounding. Which one you choose can greatly affect your earnings.

Why is this important? Because when making investment decisions on DeFi platforms or staking, if you don’t understand what APR is, you might be misled by superficial numbers. When compounding occurs frequently, looking at APY allows you to accurately grasp how much your actual earnings will be. Conversely, for products or loans without compounding, APR is sufficient.

As a rule of thumb, if you want to aim for high returns through the power of compounding, look for products with APY. If you’re considering simple interest products or loans, you can clearly judge using APR.

A common question is that APY changes over time. Since protocols often adjust rates frequently based on policy or market demand, it’s always good to check whether the rate is fixed or variable. The reason APY is higher than APR is because of the power of compounding. Especially when the frequency of compounding is high, the returns over time will surpass those of APR.

You can find APY offered on most DeFi platforms and staking programs. Many protocols provide APY for major assets like ETH, BTC, and stablecoins, and the same applies to products from large exchanges’ Earn services. When choosing a platform that fits your investment style, it’s really important to understand what APR is and to distinguish between APY and APR.

Finally, a note: this information is for educational purposes. Before actually investing, be sure to do your own research and, if possible, consult a financial advisor.