APY and APR: Why do you earn differently with the same 20% yield?

When looking at yields in DeFi, you must have come across the terms APY and APR. Many people think they are the same thing, but the difference is significant.

APR is simple: it is the annual interest rate, not considering compound interest. If you deposit 10,000 yuan with an annual interest rate of 20%, you earn 2,000 yuan in one year, that's how it's calculated. After three years, you earn 6,000 yuan, linear growth.

APY is the real yield: It takes compounding into account. With the same 20% APR, if compounded monthly, you could earn 12,429 in a year, which is 429 more than APR. What if compounded daily? That would be 12,452 in a year. It looks similar, but what about over three years?

• 20% APR (no compounding) for three years → $16000
• 20% APR compounded daily for three years → $19309

Earn 3309 more, this is the power of compound interest.

Conversion Formula: 20% APR compounded monthly = 21.94% APY; compounded daily = 22.13% APY.

What DeFi Investors Must Know: Staking and lending products are represented by APY, but be careful—some projects' “APY” is just token rewards; if the token price drops, you will still incur losses. When comparing products, it's essential to standardize the units; don't directly compare APR and APY. The more frequent the compounding, the higher the returns, which is crucial.