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 compounding. If you deposit $10,000 at 12% APR and don't reinvest rewards, you earn exactly $1,200 at year end.
APR is the traditional finance standard used by banks for loans and savings accounts. Some DeFi protocols use APR for clarity when rewards are distributed infrequently.
What Is APY?
APY (Annual Percentage Yield) accounts for compounding — earning interest on your previously earned interest. When a protocol advertises "150% APY," they're including the compounding effect of reinvested rewards.
APY is always equal to or higher than APR for the same underlying rate. The more frequently rewards compound, the higher the effective APY.
The Compounding Difference
Formula: APY = (1 + APR/n)^n − 1 where n = 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 compounding frequency affects your returns for any APY and time period.
Why DeFi APYs Look So High
DeFi protocols often advertise 50–1000% APY. These rates exist because of new token emissions to liquidity providers (inflationary incentives), low initial liquidity making yields look huge, and protocols competing for capital with high early rates.
These rates are almost always 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 Before Chasing High Yields
- Smart contract risk: Protocols can be exploited or contain bugs
- Token inflation risk: Reward tokens can lose value faster than you earn them
- Impermanent loss: Providing liquidity can reduce your position (use our IL Calculator)
- Rug pulls: Anonymous teams can drain protocol funds