## What are you really looking at when you see APY and APR while saving?

In DeFi or cryptocurrency financial products, the two most common terms are APY and APR. At first glance, they look similar, but if you confuse them, your earnings could be off by a thousand or two. So today, let's thoroughly clarify these two concepts.

## Let's start with something simpler: What does APR mean?

APR stands for Annual Percentage Rate, and the simplest way to understand it is: **how much interest you can earn in a year**.

For example, if you deposit 10,000 on a platform with an APR of 20%, after one year you will earn 2,000 in interest, and your account will have 12,000. After two years, it will be 14,000, and after three years, it will be 16,000—just a straight line increase.

This algorithm is very simple and straightforward: Principal × Interest Rate = Interest for one year.

## But DeFi products use APY, why is it different?

APY stands for Annual Percentage Yield, and the key difference lies in one word: **compound interest**.

What is compound interest? Simply put, it is when the interest you earn continues to earn interest.

It's still the same example as before. If the platform doesn't give you 2000 yuan all at once after a year, but instead pays you interest in installments every month, then the situation changes:

- In the first month, you deposit 10,000 yuan and earn some interest, for example, 166 yuan.
- In the second month, your principal has turned into 10166 yuan, and now this amount earns interest.
- In the third month, the principal has increased again, continuing to earn more interest.
- ...and so on this way

**The shorter the interest accrual period, the greater the power of compound interest.**

The same principal of 10,000 with a 20% APR:
- Monthly compound interest: After one year, you will have 12429 (earning an extra 429)
- Compound interest daily: After one year, you will have 12452 yuan (earning an additional 452 yuan)
- Compound interest calculated daily, extended to 3 years: ultimately receive 19,309 (which is 3,309 more than simple interest!)

This is why some products emphasize "daily compounding" or "real-time compounding"—because the higher the compounding frequency, the faster your money grows.

## APY means the real yield after taking compound interest into account.

APY is the actual annual yield that takes into account the compounding effect based on APR.

The conversion formula is actually very simple:
- 20% APR compounded monthly = **21.94% APY**
- 20% APR compounded daily = **22.13% APY**

It may not seem like much, but when multiplied by your principal and time, it becomes a real difference.

**Core Memory Method:** The "Y" in APY represents Yield(, which is one more letter than the "R" in APR, representing Rate). APY is also "more complex and more profitable" than APR.

## Common Pitfalls When Choosing DeFi Products

Many DeFi products, cryptocurrency savings, and staking products now indicate APY. However, there are a few details to pay attention to:

**First, there are differences between APYs.**

Both products are marked with a 20% APY, one compounds monthly and the other compounds daily, so the actual returns are different. Therefore, when comparing products, it is essential to look at the compounding period.

**Secondly, some products have fake APYs.**

Some DeFi products' "APY" is actually calculated using cryptocurrency rewards, not fiat currency. For example, if you stake ETH to earn APY, the rewards you receive are in ETH. If the price of ETH drops by 50%, even if you are still earning APY, your fiat account balance may have already suffered a loss.

**So it is essential to understand: whether this APY is a fiat currency return or a cryptocurrency reward.**

**Third, APR and APY cannot be directly compared.**

One product offers 10% APR compounded daily, while another offers 11% APY compounded monthly. The former may be more cost-effective than the latter. You can use online tools or calculate the corresponding APY for the APR yourself to compare.

## Summary

- **APR** = A straightforward annual interest rate that does not take compounding into account; interest is simply added together.
- **APY** = The actual annual percentage yield considering compounding, which is always higher than the APR (the higher the compounding frequency, the greater the difference)
- **When selecting products in DeFi:** Make sure to compare using the same terminology, pay attention to compounding frequency, and also clarify whether the APY is backed by fiat or cryptocurrency rewards.

A final reminder - digital asset prices are volatile, and investing carries risks. Even if the APY is high, if the coin price drops, your fiat account could still incur losses. So understanding the APY is important, but what's even more important is choosing the right project.