Recently, I saw many people in the community asking what APY is, and I realized that many beginners are still a bit confused about this concept. In fact, understanding APY and APR can have a pretty significant impact on how much you can earn through DeFi and staking.

Let’s talk about APR first. This is the annual interest rate. A simple way to think about it is: without considering compounding, how much interest you can earn in one year. For example, if you invest 1,000 yuan into a certain project and the annual interest rate is 10%, then in one year you’ll earn 100 yuan—just like that. The issue is that it doesn’t include any compounding effect, so your earnings are fixed and won’t automatically grow.

But APY is different. APY (annual percentage yield) takes compounding into account—meaning the interest you earn can keep generating interest. With the same 1,000 yuan and a 10% annual rate, if you compound every day, by the end of the year you’ll earn more than 100 yuan, which is a bit more. This is especially obvious in the crypto space, because many DeFi protocols set up automatic compounding, and some even compound daily.

So what is APY? Simply put, it’s the real yield after factoring in the compounding effect. If you’re staking or taking part in DeFi liquidity mining, the APY number you see is the yield you can actually receive—especially when the compounding frequency is relatively high.

I think this is key when choosing investment products. If you’re looking at a DeFi platform or a staking plan, you should definitely pay attention to APY rather than APR, because APY can truly reflect your returns. For assets like ETH, BTC, or stablecoins, many platforms offer APY rewards, and the differences can be pretty large.

Also, keep in mind that in the crypto market, APY often changes and isn’t fixed. This depends on the protocol’s policies or market demand, so you should check it regularly and don’t assume the interest rate will stay the same all the time.

One detail is that APY is usually higher than APR, and the reason is the power of compounding. The higher the compounding frequency and the longer the time, the more obvious the difference becomes. So if you want to earn more through compounding, you should find investment products that offer APY.

All in all, understanding the difference between APY and APR can help you make smarter investment decisions. Especially in DeFi, choosing the wrong one could mean you earn much less over the course of a year. I recommend that beginners get this sorted out before they start investing.