APY vs APR: What's the Difference?
How it works
APR annualizes a rate without compounding: earn 12% APR on 1,000 USDC and, if you never reinvest, you end the year with 1,120. APY assumes earnings are reinvested each period, so interest earns interest. The conversion is APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year. At low rates the gap is small — 5% APR compounded daily is 5.13% APY — but it explodes at DeFi-scale rates: 100% APR compounded daily is roughly 171% APY.
DeFi protocols mix the two freely. Lending markets like Aave and Compound accrue interest every block or second and typically display APY. Uniswap-style liquidity-pool fee returns are usually quoted as APR, because trading fees sit in the pool rather than being reinvested on a fixed schedule. Auto-compounding vaults such as Yearn or Beefy harvest reward tokens and reinvest them, converting an underlying APR into a realized APY, minus harvest and gas costs.
Both figures are snapshots, not promises. Lending rates float with pool utilization, and farm rates depend on emission schedules and the reward token's market price. A quoted 300% APY assumes today's rate, token price, and emissions hold for a full year — in practice they often do not hold for a week.
Why it matters
Displaying APY makes a farm look richer than a competitor quoting APR on the identical underlying rate, and protocols exploit this. Comparing a vault's APY against a pool's APR is apples to oranges — convert to one basis first. High advertised APYs also hide the two ways DeFi yield actually dies: reward-token emissions dilute holders (yield paid in an inflating token), and floating rates collapse as capital piles in. Finally, compounding is not free on-chain — every reinvestment costs gas, so a small position chasing a headline APY on Ethereum mainnet may realize something closer to the raw APR after transaction costs.
Real-world examples
OlympusDAO (OHM) in 2021 advertised staking APYs above 7,000%. The underlying mechanic was a rebase of roughly 0.3–0.6% paid every eight hours; compounding three rebases a day for a year produced the headline number. Stakers really did receive more OHM — the compounding was real — but the yield was pure token inflation, and when OHM's price fell more than 95% from its 2021 peak, the dollar value of staked positions collapsed regardless of the APY. It remains the canonical lesson that APY measures token quantity, not value.
FAQ
Is APY always higher than APR?
For the same nominal rate, yes — APY includes compounding, so it is at least equal to APR and grows with compounding frequency. The two are equal only when interest compounds once a year or not at all. If one protocol's APY is lower than another's APR, the underlying rates genuinely differ.
How do I convert APR to APY?
Use APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year. For example, 20% APR compounded daily is (1 + 0.20/365)^365 − 1 ≈ 22.1% APY. Remember the reverse too: an advertised APY overstates what you will earn unless you actually reinvest at that frequency, which costs gas on-chain.
Why do DeFi farms show such enormous APYs?
Three reasons: compounding math amplifies high nominal rates (100% APR compounded daily is about 171% APY); quotes assume today's reward-token price and emission rate persist for a full year; and yield paid in an inflating reward token often has far lower realized dollar value. Treat any triple-digit APY as a snapshot of current emissions, not an expected return.
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