Definitions
APR (Annual Percentage Rate) — annual interest rate without compounding. Simple interest.
APY (Annual Percentage Yield) — annual percentage yield with compounding (capitalization). Compound interest.
Difference Between APR and APY
Investment: $10,000
Rate: 100% annually
APR 100%:
$10,000 + $10,000 = $20,000
APY 100% (daily compounding):
$10,000 × 2.71 = $27,100
Formulas
APR (simple interest)
Final amount = Principal × (1 + APR)
$10,000 × (1 + 1.0) = $20,000
APY (compound interest)
APY = (1 + r/n)^n - 1
where r = APR, n = number of compounding periods
With daily compounding (n=365):
APY = (1 + 1.0/365)^365 - 1 = 171.5%
Conversion Table
| APR | APY (daily) | APY (weekly) |
|---|---|---|
| 10% | 10.5% | 10.4% |
| 50% | 64.8% | 63.2% |
| 100% | 171.5% | 159.7% |
| 200% | 638.9% | 542.8% |
| 500% | 14,641% | 8,467% |
Where They're Used
APR is used in:
- Traditional loans
- Simple staking programs
- Lending without auto-compounding
APY is used in:
- Yield farming
- Automated vaults
- Compound, Aave and other DeFi protocols
How to Read DeFi Metrics
When evaluating protocols, pay attention to:
| Metric | What to look for |
|---|---|
| APR vs APY | APY is always higher at the same rate |
| Compounding frequency | More frequent = higher APY |
| Sustainability | High rates are often temporary |
| Yield source | Fees vs token emissions |
Pitfalls of High APY
1. Reward Token Inflation
APY: 500%
Reward token dropped 90%
Real return: negative
2. Impermanent Loss
When providing liquidity, IL can consume all yield.
3. Temporary Programs
High APY usually at launch, then decreases.
APR/APY and DCA
With DCA strategy:
| Strategy | APR/APY |
|---|---|
| Pure DCA | Not applicable (just buying) |
| DCA + staking | Usually 3-8% APR |
| DCA + DeFi | Various APY, higher risks |
Practical Calculation
Before entering a protocol, calculate:
Amount: $10,000
Advertised APY: 50%
Entry/exit fees: $100
Annual fees: $200
Real income: $5,000 - $300 = $4,700
Real yield: 47%
Important: Always account for blockchain fees (gas) when calculating real returns. On Ethereum, they can consume a significant portion of profits for small amounts.
