Recently, I was reviewing how most people confuse two terms that are fundamental if you really want to understand how much you can earn in crypto: APY and APR. The difference seems small, but in practice, it can significantly change your numbers.

Basically, the APY is what really matters when calculating returns because it includes compound interest. That is, you earn interest on your initial interest, creating that exponential effect we all seek. The APR, on the other hand, is just the annualized rate without considering compounding. In theory, it sounds similar, but if a platform offers you 2% APR versus 3% APY, that 1% difference comes precisely from how the system automatically reinvests your earnings.

The APY formula is quite straightforward: (1 + r/n)^(nt) - 1, where r is the nominal rate, n is the number of compounding periods per year, and t is the time. But here’s the interesting part: in crypto, this gets complicated because market volatility, liquidity risks, and smart contract risks come into play, which you don’t see in traditional finance.

Where you see APY in action is mainly in three strategies. First are crypto loans, where you connect with platforms that pay you a fixed APY for lending your assets. Second is yield farming, which is more aggressive: you borrow assets to seek higher yields by moving them between markets. Here, the APY can be very high, but so are the risks, especially with new projects. And third is staking, where you lock your crypto in a blockchain network, usually in Proof of Stake systems, and receive rewards that typically offer a more attractive APY.

The important thing is to understand that although APY gives you a clearer picture than APR of what you will actually earn, it’s still only part of the analysis. Each type of investment has its own advantages and dangers. Before investing money, you need to weigh volatility, liquidity risks, and how much risk you’re willing to take. APY is the key metric for comparing opportunities, but it’s not the whole story.