Recently, while researching DeFi products, I found that many people confuse APR and APY. In fact, these two concepts are quite different and directly affect how much you ultimately earn. Simply put, APR is the annual interest rate, not considering compounding; APY is the annual yield, including compounding. They sound similar, but the actual returns can be quite different.

An example makes this clear. Suppose you deposit $10,000 at an APR of 20%. Without considering compounding, after one year you get $12,000, after two years $14,000, after three years $16,000—straight line growth. But if the bank pays interest monthly, the situation changes. Each month, you receive interest that gets added to the principal, so next month you earn interest on a larger amount, which is the power of compounding.

The same 20% APR, $10,000, but with monthly compounding, after one year you get $12,429, earning $429 more than without compounding. What if it’s daily compounding? After a year, it becomes $12,452. The higher the compounding frequency, the more you earn. If you extend the time to three years, with daily compounding, you end up with $19,309, earning $3,309 more than just a simple 20% APR. This is the long-term effect of compounding—it’s really impressive.

So how do you compare different products? That’s where APY comes in. A 20% APR with monthly compounding equals a 21.94% APY, and with daily compounding, it’s 22.13% APY. APY is the annualized return that includes all compounding effects. When looking at DeFi products or crypto savings and staking, be sure to check whether the product states APR or APY, or you won’t be able to compare directly. Some products advertise with APR, others with APY—you need to convert them to the same metric to see which one is more cost-effective.

Another detail to watch out for: if two DeFi products both use APY, you should also check whether their compounding frequencies are the same. With the same APR, a product with daily compounding will definitely earn more than one with monthly compounding. Also, some crypto products’ APY refers to the tokens earned as rewards, not fiat currency returns. This is important because crypto asset prices fluctuate; your investment value in fiat terms might decline. Even if the APY looks good, if the asset’s price drops significantly, your fiat investment could still be in loss. So, always carefully review the product terms and understand what APY truly represents in that context.

In summary, remember that APY is more complex than APR because it accounts for compounding. The higher the compounding frequency, the higher the APY. When comparing rates in DeFi and crypto products, always use the same metric and clarify what APY actually means. Only then can you truly determine which product is more suitable for you.