When I started investing in crypto I found quite confusing understanding the difference between APR and APY so I decided to bring to you this post which I hope it helps you.

APR and APY are concepts that appears a lot in crypto environment in DeFi and CEXs and people use to think that they are the same but they are not. This knowledge can help you to be more efficient when investing.

What are APR and APY?

APR (Annual Percentage Rate) is the annual rate of return. It does not take into account compounding interest, meaning that the earned interest is added back to the main one.

APY (Annual Percentage Yield) does take into account compounding interest. It is the total amount earned in a year.

APR is commonly used in lending while APY is better to calculate the returns on your investments.

How are they different?

I will use the same base example for both.

For example, if you deposit and lend 1 Bitcoin (BTC) (A dream come true) to a platform that offers a 10% APR and you earn interest on a daily basis.

APR

In this case compounding interest is not taken into account.

To calculate the daily interest you will have to use this formula where "Principal" is the amount of crypto you deposited:

Daily Interest = (Principal * APR / 365) Example Daily Interest = (1 BTC * 10% / 365) = 0.00027397 BTC 

You would earn 0.00027397 BTC per day over the year. A total of 0.1 BTC.

APY

In this case compounding interest is taken into account.

To calculate the daily interest and include the compounding you can use the following formula, where "Principal" is the amount of crypto you deposited and "n" is the number of times the interest is compounded per year. (In our case as it is compounded daily it will be 365)

Daily Interest = Principal * ((1 + APR / n) ^ (n / 365) - 1) Daily Interest = 1 BTC * ((1 + 10% / 365) ^ (365 / 365) - 1) = 0.00027832 BTC 

You would earn 0.00027832 BTC taking into account compounding. A total of 0.10098455 BTC in a year.

In case of APY we must know that APY fluctuate based on market conditions and supply/demand for borrowing/lending.

Math Meme

I hope you enjoyed the post and learned something new.

Thanks for the reading!