Recently, while exploring DeFi products, I found that many people confuse the concepts of APY and APR. Actually, understanding the difference between them can significantly impact your actual returns.

First, let's talk about the simplest one, APR, which is the annual percentage rate. It's straightforward—how much percentage you earn in a year. For example, if you deposit $10,000 with an APR of 20%, after one year you'll have $12,000, after two years $14,000, after three years $16,000—growing linearly. The meaning of APY is a bit more complex; it stands for annual percentage yield, and the key difference is that it accounts for compounding.

What is compounding? Simply put, "interest on interest." Suppose that $10,000 earns interest monthly compounded, with interest added to the principal each month. The next month's interest is calculated based on this new principal. As a result, after a year, you don't have $12,000 but about $12,194, earning an extra $194 due to compounding. If it’s daily compounding, you'd have about $12,213. Although the difference seems small, over longer periods it becomes more noticeable. For the same 20% APR product, after three years with daily compounding, you'd end up with about $19,309, earning over $3,000 more than without compounding.

So, the core meaning of APY is: it reflects the actual annualized return you get when considering the frequency of compounding. The more frequent the compounding, the higher the APY. A 20% APR with monthly compounding is roughly equivalent to a 21.94% APY, and with daily compounding, about 22.13% APY. Remember a simple way to distinguish: the word "yield" has one more letter than "rate," indicating a more complex and higher return.

When choosing DeFi or crypto savings products, pay special attention. Some products advertise with APR, others with APY. Never compare the numbers directly; you need to convert them to the same standard first. For example, a product with 20% APY and another with 20% APR— the latter actually yields less. Also, even if both are APY, different compounding periods lead to different results; monthly vs. daily compounding will definitely affect your returns.

There's also an easily overlooked point: in crypto products, APY usually refers to the amount of crypto assets you can earn, not the fiat value. If the price of your held tokens crashes, even with a high APY, your fiat investment value could still lose money. So, always carefully review the terms of any DeFi product and understand where the risks are.

To sum up: APR is a static fixed interest rate, while APY reflects the true annualized return after considering compounding. When comparing products, always use APY and check the compounding frequency. Only then can you truly see how much your money can earn.