What is the APR (annual percentage rate)? What is the APY (annual percentage yield)? Difference between APR and APY for crypto DeFi Projects simply explained.
APY, or annual percentage yield, incorporates interest compounded quarterly, monthly, weekly, or daily, while APR, or annual percentage rate, doesn’t. This simple distinction can make a significant difference to the calculations for returns over a period of time. It is therefore important to understand how these two metrics are calculated and what it means for the returns that you can earn on your digital funds.
What is APR?
APR stands for annual percentage rate. This is the simpler of the two terms. In simple terms, the Annual percentage rate is the interest a lender is bound to earn on their money. Also, the borrower pays for the interest over one year.
What is APY?
APY stands for Annual Percentage Yield. Unlike in the APR model, where you get a fixed amount after every year, which is decided upon by the initial principal amount itself, in the annual percentage yield, you will receive some interest every month.
Both terms are widely used in the crypto space, especially in the DeFi space where you can stake your coins and receive an APR or APY. When you have the chance to compound daily or weekly you will receive a higher % on your funds instead of compounding it once yearly. That means for DeFi projects the APY is higher than the APR.