APY vs APR in DeFi: What's the Real Difference?
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What Is APR?
APR (Annual Percentage Rate) is the simple annual interest rate without accounting for compounding. If you deposit $10,000 at 12% APR and don't reinvest your rewards, you earn $1,200 at the end of the year.
APR is what banks use for loans and savings accounts in the traditional finance world. It's also used by some DeFi protocols for clarity, especially when rewards are distributed infrequently.
What Is APY?
APY (Annual Percentage Yield) accounts for the effect of compounding — earning interest on your previously earned interest. When a DeFi protocol says "150% APY," they're including the compounding effect of reinvesting rewards.
APY is always equal to or higher than APR for the same underlying rate. The more frequently rewards compound, the higher the APY.
The Key Difference: Compounding Frequency
The formula for converting APR to APY is: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year.
- 12% APR compounded monthly = 12.68% APY
- 12% APR compounded daily = 12.75% APY
- 12% APR compounded continuously = 12.75% APY
Use our DeFi Yield Calculator to see exactly how different compounding frequencies affect your returns.
Why DeFi APYs Look So High
DeFi protocols often advertise yields of 50%, 200%, or even 1000% APY. These high rates exist because:
- Token emissions: New protocol tokens are distributed to liquidity providers as incentives
- Low liquidity: When a pool has little capital, the same reward budget generates a higher yield percentage
- Competitive farming: Protocols compete for liquidity by offering high initial yields
These rates are unsustainable. Token prices fall as new supply is distributed, and yields compress as more capital enters a pool. Always check how long a yield has been at its current level.
Risks to Know Before Chasing High Yields
- Smart contract risk: Protocols can be exploited or have bugs
- Token inflation risk: Reward tokens can lose value faster than you earn them
- Impermanent loss: Providing liquidity can reduce your position value (use our IL Calculator)
- Rug pulls: Anonymous teams can drain protocol funds