Recently, while researching DeFi products, I found that many people confuse the concepts of APR and APY. In fact, the difference between the two is quite significant and worth understanding carefully.

First, let's talk about what APR means. APR is the annual percentage rate, simply put, how much interest you can earn in a year. For example, if you deposit 10,000 dollars with an APR of 20%, after one year you will earn 2,000 dollars in interest, and the total (principal + interest) will be 12,000. After two years, it will be 14,000, and after three years, 16,000. The logic is straightforward. But there's a problem: APR does not account for compounding.

APY, on the other hand, is different. It includes the power of compounding. What is compounding? Simply put, interest earning interest. If your interest is added to the principal every month, then next month you will earn interest on a larger amount. Using the same example with a 20% APR, 10,000 dollars, but with monthly compounding, after one year you would have about 12,429 dollars, earning 429 dollars more than without compounding. If compounded daily, after a year, you'd have about 12,452 dollars.

This difference may seem small, but over longer periods, it becomes significant. The same 20% APR, over three years with daily compounding, can grow to about 19,309 dollars. That's 3,309 dollars more than if you didn't consider compounding. The more frequently the interest is compounded, the more you earn.

So, how do you convert between these two metrics? Essentially, you use APR to calculate APY. For example, a 20% APR compounded monthly is equivalent to about 21.94% APY. Compounded daily, it's about 22.13% APY. As you can see, the same APR, when accounting for compounding, results in a higher effective annual yield (APY).

Currently, many DeFi products, crypto savings, and staking products promote either APR or APY, but they often use different terms. So, when comparing products, you must convert them to the same metric to make a fair comparison. You can't directly compare a product offering 20% APR with another offering 15% APY, as they are not directly comparable.

There's also an important detail: some DeFi products refer to APY as the amount of cryptocurrency you can earn, not the actual return in fiat currency. Cryptocurrency prices are highly volatile. Even if your APY looks high, if the coin's price drops significantly, your investment value (when converted to fiat) could actually decrease. So, don't be fooled by high APY figures; always check the specific terms of the product and understand what that APY really means in that context.

In summary: APR is a static annual interest rate, while APY reflects the annualized return including compounding. The higher the compounding frequency for the same APR, the higher the APY. When comparing products, always use the same terminology and be cautious—high APY doesn't necessarily mean high returns, as price volatility is the biggest risk.