I often see friends asking about APR and APY, and they get confused about which staking or yield farming product to choose. The truth is, it's not that complicated. You just need to understand the difference between these two.

Let's start with the basics. APR is the Annual Percentage Rate, or the percentage rate per year. This is the basic interest rate that does not include compounding. If you see an APR of 5%, it means your principal will earn a 5% return per year. No interest on interest is calculated. For example, investing 100 baht at 5% APR means after one year, you will have 105 baht only.

On the other hand, APY is the Annual Percentage Yield, which includes compounding. This means the interest you earn is calculated on the accumulated interest as well. It’s like your money is working to make more money. If the APR is 5%, but the interest is compounded daily, the actual return will be slightly higher than 5%.

In the crypto world, we encounter these two terms often when choosing staking pools or liquidity pools in DeFi. Some platforms will show APR, some will show APY, and some will show both. The key thing to know is that if you are a lender or investor, APY is better because it reflects the actual returns you receive.

Let’s look at a real example. Suppose you have 1 Ethereum and want to stake it on a DeFi platform that offers 24% APR. Simple calculation: after one year, you will get an additional 0.24 ETH, totaling 1.24 ETH. But if the platform provides daily returns and calculates APY instead, the actual return will be slightly higher than 24% because the interest earned on the first day is added to the principal and used to calculate the next day’s interest, and so on.

The formula for APR is straightforward: APR equals the interest rate per period multiplied by the number of periods per year. If the APR is 0.5% per month, multiply by 12 months to get 6% per year. APY is a bit more complex because it accounts for compounding: APY equals (1 + interest rate per period) raised to the power of the number of periods, minus 1. If you don’t want to do the math, you can use an online calculator.

In the context of loans or credit cards, APR is more important because it tells you how much you will pay annually. APY is less used for borrowing but is relevant for savings or investment returns.

Another thing to know is that APR can be of two types: Fixed APR, which does not change, and Variable APR, which can fluctuate with market conditions. In DeFi, Variable APR is common because the crypto market is highly volatile. When the market is good, APR may increase; when the market is bad, APR may decrease.

When choosing staking or yield farming, you should look at both APR and APY because sometimes a high APR with infrequent compounding may result in a lower APY than expected. Some platforms offer daily or hourly returns, making the APY much higher than the APR.

For example, if you invest 10,000 baht at 5% APR per year, after one year, you get 500 baht, totaling 10,500 baht. If you calculate with APY at 5% compounded monthly, the return is about 5.12%, so you will have approximately 10,512 baht. It may seem small, but over several years, the difference becomes more noticeable.

Over three years, with 5% APR annually, you’d have about 1,500 baht interest, totaling 11,500 baht. With 5% APY compounded monthly, you’d get about 1,576 baht, totaling 11,576 baht. The difference is significant.

In the crypto world, both APR and APY are important depending on whether you are a lender or a borrower. If you are lending or investing, you want a higher APY because it shows the actual return. If you are borrowing, you prefer a lower APR because it indicates your actual cost.

When choosing a staking pool, check whether the platform shows APR or APY. If it shows APR, calculate the APY yourself by considering how often the platform compounds the returns—daily, hourly, or monthly. The more frequent, the higher the APY.

Another thing to watch out for is that some platforms may display very high APRs but do not include fees or other costs. Always read the details carefully, as fees can eat into your returns significantly.

In summary, APR and APY differ mainly in that APR does not include compounding, while APY does. In crypto investments, APY usually provides a better estimate of actual returns. When choosing staking or yield farming products, always check the APY and how often the platform compounds. If unsure, use an online calculator to compare APR and APY clearly.