I just reviewed something that many people don’t understand well in crypto, and it’s worth clarifying: what exactly is APY and why is it so different from what most believe.

Many confuse APY with APR, and that costs them money. Let me explain simply. APY (Annual Percentage Yield) is the metric that really matters when you invest in crypto because it includes compound interest. That means your earnings generate more earnings. It’s that ‘interest on interest’ effect that significantly amplifies what you earn in a year.

APR, on the other hand, is just the nominal rate without that compounding effect. That’s why you always see lower numbers. If an investment offers you 2% APR but 3% APY, that 1% difference is pure power of compounding reinvesting what you earn.

Now, calculating what APY is in cryptocurrencies isn’t as straightforward as in traditional finance. The technical formula exists (APY = (1 + r/n)^(nt) - 1), but in crypto you have to consider volatility, liquidity risks, and smart contract risks. That changes the game.

Where you see this most in action is in three main areas. First are crypto loans, where you lend your assets and receive an agreed-upon APY. Second, yield farming, where people move assets seeking the highest returns, but beware: high APYs generally mean high risks, especially on new platforms. And third, staking, where you lock your crypto in a blockchain network and earn rewards, often with more attractive APYs on Proof of Stake networks.

The reality is that understanding what APY really is gives you an advantage. But it’s not the only factor. You have to look at everything together: market volatility, your risk tolerance, liquidity risks. APY is just one piece of the puzzle. Many see a high number and jump in without considering the rest. That’s where most lose.