APR vs APY: What's the difference?

6.

APY and APR are used to calculate interest for crypto investments and loans. However, they are not the same.

The annual percentage yield refers to the amount of interest earned over a year, while the annual percentage rate refers to the amount that must be paid as interest. When comparing APR and APY returns, since all other factors such as principal amount, interest rate and investment period are the same, the main difference is compound interest.

It represents the total return, including the amount earned on interest and the principal investment. Since the APR does not take compound interest into account, the APY always yields a larger sum.

Crypto investors can fund liquidity pools on exchanges, keep crypto in savings accounts, stake their coins, or invest in yield farms. The difference between APY and APR is crucial in understanding where money is best invested. In practice, APRs are beneficial to borrowers. However, people wishing to invest funds should consider APY rates to maximize their profits.

As more and more DeFi tools and cryptocurrencies use APRs, investors have to do manual compounding, where they have to reinvest their earnings, either daily or weekly, to get a larger compound interest.