APY vs APR: Why is the yield difference in Decentralized Finance so large?

In DeFi Mining and lending products, you often come across two terms: APY and APR. Many people confuse them, but the difference is significant.

APR is the simple annual interest rate — only calculates the earnings generated from the principal. For example, if you deposit 10,000 dollars, at an APR of 20%, you earn 2,000 in a year and 6,000 in three years.

APY is the actual annual yield — including the compounding effect. With the same principal and 20% APR, if compounded monthly, you can earn $12,429 in a year (an extra $429); if compounded daily, it would be $12,452 in a year. By the third year, daily compounding will yield $19,309 — which is $3,309 more than without compounding.

Why is there such a big difference? Because every time the interest is added to the principal, the next time interest will be calculated on a larger amount. This is the magic of compound interest.

Practical Application: Many DeFi products label an APY of 20%, but this is actually based on different compounding frequencies. Some compound daily, while others compound monthly. With the same APR, the more frequently the compounding, the higher the actual returns. More critically — some projects' “APY” is actually just the number of tokens, without considering the price fluctuations of the tokens. If the token price falls, your actual returns could be negative.

Comparison Tips: When selecting DeFi products, be sure to clearly identify whether it's APY or APR, and what the compounding frequency is. Don't be dazzled by beautiful numbers.