Recently in the crypto community when discussing investments, people often confuse APR and APY. In fact, these two concepts are quite different. Today, let's talk about what annual interest rate really is and how it differs from APY.

First, let's talk about APR, which stands for Annual Percentage Rate. Simply put, APR is the straightforward interest calculated on the principal, not considering the effects of compounding. For example, if you borrow money or invest in a project, APR tells you how much interest you'll pay or earn over a year. Credit cards, consumer loans, and mortgages are usually expressed using APR.

But here's a question: what exactly is the annual interest rate? It’s actually just a simple calculation based on the principal, without considering the power of compounding. That means APR may not accurately reflect your true annual return because the number of times interest is compounded within a year directly impacts the final earnings.

APY, on the other hand, is different. APY (Annual Percentage Yield) accounts for the effects of compounding. Imagine that your interest not only accrues on the principal but also on the previously earned interest—that's the magic of compounding. Fixed deposits, funds, and crypto staking are usually expressed with APY because they all involve compound interest calculations.

Therefore, in practice, APY is usually higher than APR. If you want to assess the real return of an investment, looking at APY is more accurate because it reflects how your money truly grows. Especially in the crypto investment space, many staking projects use APY to show annualized yields, so you can see the actual effect of compounding more clearly.

To sum up simply: the core difference between annual interest rate is that APR is simple interest, while APY includes compounding. When choosing investment or lending products, be sure to check which metric is used—don't be fooled by the surface numbers.