How to choose the right metric: understanding APY and APR in crypto products

Introduction

When exploring earning opportunities with your digital assets — through staking, yield farming, or crypto savings — you inevitably encounter two rates simultaneously. Many find this confusing, but in reality, it’s simpler than it seems. The annual percentage rate and the annual percentage yield are two ways to represent the same income, but they tell completely different stories about how much you will actually earn.

What is the difference between APR and APY?

Let’s start with basic definitions. APR (Annual Percentage Rate) is the simplest way to express returns. It’s a fixed interest rate you earn on your funds over one year, without accounting for any additional factors.

Imagine you deposit $10,000 into a product with a 20% APR. After a year, you will receive $2,000 in interest. After two years — $4,000, after three — $6,000. The calculation is linear and predictable: your principal ($10,000) multiplies by the rate (20%).

However, in the world of crypto products and DeFi platforms, things work differently. Most of them use APY (Annual Percentage Yield), which accounts for one very powerful mechanism — compound interest.

The power of compounding: how APY changes your earnings

Compound interest means earning returns not only on your initial funds but also on the accumulated interest. It’s like a snowball effect: each day, your base for calculating interest increases.

Returning to the example with $10,000 at 20% annual interest, but this time assuming the platform compounds interest monthly:

Instead of ending the year with $12,000, you will get $12,429. The extra $429 is the result of earning interest on an increasingly larger amount each month.

If the same product calculated interest daily (which is more common in crypto ecosystems), the amount would be $12,452. The difference may seem small at first glance, but look further:

After three years with daily compounding, you will have $19,309 instead of the expected $16,000 with simple APR. That’s an additional $3,309 — nearly 21% more profit, just because interest was compounded more frequently.

This is exactly what APY figures reflect. The same 20% APR with monthly compounding equals 21.94% APY. With daily compounding — it’s already 22.13% APY.

How to compare crypto products with different rates

A common mistake investors make is comparing APR with APY or ignoring the compounding frequency altogether. This can lead to incorrect choices:

Product A: 20% APR with monthly compounding (= 21.94% APY)
Product B: 22% APY with daily compounding

Product A may look worse numerically, but if you compare them in terms of APY, Product A actually yields less. The correct approach is always to convert all rates to APY for a fair comparison.

In the DeFi and crypto savings ecosystem, the compounding frequency often varies between products. One staking pool might distribute rewards daily, another hourly. To understand which product is truly better for you, you need to know both metrics and the compounding frequency.

An important nuance: APY in crypto is not the same as in fiat

Here lies a trap that newcomers to crypto often overlook. When a platform states “APY 15%”, it often refers to a 15% increase in the crypto asset itself, not in the fiat value of your investments.

If you deposit $10,000 in Bitcoin at a price of $50,000 per coin, you get 0.2 BTC, and after a year, if the coin’s price rises to $60,000, your position is now worth $12,000 in fiat. Profitable, right? But if Bitcoin drops to $40,000, that same 0.2 BTC will be worth only $8,000 — below your initial investment, despite the APY.

Therefore, before choosing a crypto product, carefully review the terms. Understand in which currency the rate is expressed, what compounding frequency the platform uses, and what your actual risks are.

Conclusion

APY and APR are two sides of the same coin. APR provides a basic indicator, while APY shows your real return accounting for compound interest. In the world of crypto products and staking, APY will always be a higher number if compounding occurs more than once a year.

The main rule: before comparing two products or making an investment decision, ensure you are comparing the same metrics. Convert APR to APY or vice versa, check the compounding frequency, and consider the volatility of crypto assets. A proper understanding of these metrics will save you from one of the most common ways to lose money on investments.