If you’re new to cryptocurrencies and DeFi, you’ve probably seen terms like APY and APR quite often. But in reality, many people probably don’t fully understand what the difference is between these two—and why they’re so important.

Recently, when looking at DeFi platforms and staking programs, I often see APY and APR used inconsistently, and I hear from many people who are unsure which one to choose. So today, let’s clearly explain the difference between these two, so you can make a smarter decision when earning interest with crypto assets.

First, let’s start with APR (annual percentage rate). You can think of APR as a simple annual interest rate that does not take compounding into account. For example, if you invest $1,000 in a project with an APR of 10%, you would earn $100 in profit after one year. But here’s the key point: because APR does not include compounding, even as time passes, that interest does not generate additional interest. In other words, it’s simple interest only.

On the other hand, APY (annual percentage yield) represents the actual return that includes the effects of compounding. Even with the same 10%, in the case of APY, the calculation may be done with compounding every day—so after one year, you’ll get back an amount that’s slightly more than $100. Especially in crypto DeFi protocols, where compounding is carried out frequently, APY more accurately reflects your real earnings.

Why this difference matters is that when you invest in DeFi platforms or stake, if you understand APY, you can properly estimate how much profit you can actually earn. If compounding happens every day, you can generally expect higher returns with APY than with APR. Conversely, if you’re considering loans or deposits that don’t involve compounding, APR is enough to form a good estimate.

Because APY changes frequently depending on market demand and the protocol’s policies, you should always check whether the rate is fixed or variable before investing. Many DeFi platforms and staking programs provide APY for assets such as ETH, BTC, and stablecoins. The Earn products from major CEXs do this as well.

In conclusion, if you want to aim for higher returns through compounding, you should look for investments that offer APY. Meanwhile, for products or loans based on simple interest, you can make your decision using APR. When earning interest with crypto assets, it’s important to understand the differences between these two and choose the one that best fits your investment strategy.

Finally, one more thing: this information is for educational purposes only and is not investment advice. Before making any investment decision, be sure to do your own research, and consult a professional if needed.