APR vs APY: understanding DeFi yield
APR vs APY: what is the difference?
APR (Annual Percentage Rate) = simple interest. You earn only on your initial capital. APY (Annual Percentage Yield) = compound interest. You earn interest on your interest.
Formula
APY = (1 + APR / n)^n - 1
Where n = number of compounding periods per year.
Impact of compounding frequency (APR = 100%)
| Frequency | Resulting APY |
|---|---|
| Annual (1x) | 100.00% |
| Monthly (12x) | 161.30% |
| Weekly (52x) | 169.26% |
| Daily (365x) | 171.46% |
Warning: very high APY often comes with significant risks (impermanent loss, rug pulls, reward token depreciation).