Someone asked me about APR and APY very often. Both of these seem similar but actually are completely different. If you don't understand them well, you might make the wrong investment choice.

Let's start with APR first. It stands for Annual Percentage Rate, simply put. If you invest 100 baht at an APR of 5%, in that year you will earn only 5 baht in interest. The interest is calculated only on the principal amount, with no compounding. As for APY, that's the real one.

APY (Annual Percentage Yield) takes into account compound interest, which means you earn interest on the interest as well. If we use the same number, 5% APR, and calculate APY with daily compounding, it becomes 6.18% because of compounding. The more frequently it compounds, the higher the APY.

In the crypto world, this difference is very important. For example, if you stake Ethereum with an APR of 24%, in the first year you will get 0.24 ETH from 1 ETH invested. But if it's an APY that accounts for daily compounding, the return will be higher because the interest earned is compounded back into the pool every day.

Another example: imagine you invest 10,000 baht at 5% APR for three years. You will earn 1,500 baht in interest. But if you calculate APY with annual compounding over the same three years, you'll get 1,576.25 baht. This difference may seem small, but over longer periods and higher rates, the gap becomes more significant.

If you're an investor, APY is what you should look at because it shows the real return you'll get. APR is more suitable for borrowers because it's lower. But if you're yield farming or staking in DeFi networks, you should look at APY because it reflects the actual profit.

The formula to calculate APY is (1 + r/n)^n - 1, where r is the periodic interest rate, and n is the number of compounding periods. But don't worry about the formula, as most platforms already display APY for you.

In summary, APR doesn't consider compounding, while APY does. In the crypto world, where compounding happens frequently, always choose APY. The returns will be higher and grow faster.