APR vs. APY: The Difference That Costs You Money

APR (annual percentage rate) is the simple yearly rate with no compounding. APY (annual percentage yield) assumes your earnings are reinvested and start earning themselves. Same nominal rate, different outcome — and the gap grows with rate and compounding frequency.

The formula

APY = (1 + r ÷ n)ⁿ − 1, where r is the APR and n is the number of compounding periods per year. Monthly compounding: n = 12. Weekly: 52. Daily: 365.

A worked example

A pool advertises 12% APR. Compounded monthly, the APY is (1 + 0.12/12)¹² − 1 ≈ 12.68%. Compounded daily: ≈ 12.75%. On $10,000 over three years with monthly compounding you end with about $14,308 — versus $13,600 at simple APR. The difference is $708 from doing nothing but reinvesting.

DeFi advertising tricks

• Huge APYs assume reward-token prices stay constant — they rarely do.
• Some quote "APY" but pay rewards you must claim and compound manually (gas eats the gain).
• Rates are variable: today’s 20% can be 3% next month as TVL flows in.
• Impermanent loss in liquidity pools can exceed the entire yield.

Model your own scenario — principal, periodic contribution, daily/weekly/monthly compounding — with our compound interest calculator.