I just understood this more clearly. Before, I was always confused about whether APR means Annual Percentage Rate and how it differs from APY.

Let me explain. APR stands for the normal annual percentage rate. There is no compounding. If you invest 10 Bitcoin at an APR of 6%, after one year you will get an additional 0.6 BTC—just that. There is no interest on interest.

APY is different. It takes into account the compounding of interest. If the APR is still 6% but you calculate it as APY with daily compounding, the return comes out to 6.18% instead of 6%. Why is it higher? Because the interest is calculated on the principal plus the interest you earned earlier, which makes it grow faster.

In the crypto industry, both of these are widely used—especially when you do staking or yield farming on DeFi platforms. For example, if you invest 1 Ether in a Lending Pool on a platform with an APR of 24% and lock it for 1 year, you will get an additional 0.24 Ether. But if it’s APY with compounding every day, the return will be higher, because the interest increases every 24 hours.

The way to calculate APR uses a basic formula: APR = P x T, where P is the rate per period and T is the time period. APY uses a more complex formula: APY = (1 + r/n)^n - 1, because it must account for compounding.

The key point is this: if you’re an investor, APY is better because you earn interest on interest. But if you’re borrowing money, APR is better because you pay less.

Here’s an example. Imagine you save 10,000 baht in a savings account that provides a return of 5% per year. If you only calculate APR over three years, you’ll get 1,500 baht. But if you calculate APY with annual compounding over the same three years, you’ll get 1,576.25 baht—much more.

In the crypto world, returns are often much higher than traditional finance, but the risk is higher too. So understanding whether you’re getting an APR or APY rate is important as well. Sometimes DeFi platforms offer daily interest payments, which means your APY will be much higher than the APR they advertise.

This isn’t as complicated as you might think. There are plenty of online calculation helpers. But if you understand the basics—that APR is the simple rate and APY is the compounding type—that’s basically it. Crypto investing becomes a lot easier.