There are two terms frequently encountered by cryptocurrency investors: APR and APY. I noticed that most people think they are the same, but there is a really important difference between them.

Let's start with the simpler one. APR (Annual Percentage Rate) is just the simple interest rate applied to the principal. For example, if a credit card has a 15% APR, the calculation is only based on the principal amount. Mortgages, consumer loans, and credit card interest rates are usually expressed with APR.

But if you ask what APY means, the answer is a bit more interesting. APY (Annual Percentage Yield) also includes compound interest. That is, interest is not only calculated on the principal, but also on the interest earned. This means that APY is almost always higher than APR.

Where do you see this in the real world? Bank deposit accounts, investment funds, and crypto staking use APY. When you stake, the returns you get are usually shown in terms of APY because the effect of compound interest is very significant here.

To give a practical example: there is a significant difference between 15% APR and 15% APY. If the interest is compounded daily, the APY at the end of the year can provide a return significantly higher than the APR. The more frequently the interest is compounded, the larger this difference becomes.

Relying solely on the APR figure when making investment or staking decisions can be misleading. Looking at APY is smarter because it shows you how much you will actually earn. Especially in crypto investments, this difference can amount to significant sums on a monthly or yearly basis. When comparing returns of different assets on Gate, it’s also important to keep this distinction in mind.