mini
APR stands for Annual Rate and refers to the interest you receive for locking your tokens in DeFi protocols. APY stands for Annual Yield and is calculated as compound interest. Let’s look at how APY and APR work to understand the difference between the two.
If you are considering decentralized finance (DeFi), you have probably come across the terms APY and APR. These terms are used to indicate the types of returns that apply to funds deposited with DeFi protocols. Although the two acronyms are very similar, there are subtle differences that can have a big impact on your bottom line. Let’s see how APY and APR work to understand the difference between the two.
About APR
APR stands for Annual Rate and refers to the interest you receive for locking your tokens in DeFi protocols. It is calculated as simple interest and expressed as a percentage of the principal.
For example, if APR contributes 100 tokens to a 10% liquidity pool, you will receive 10 tokens as interest at the end of the year. Easy to understand and easy to calculate. Just multiply the APR by the deposit amount and you will get a decent return.
Understanding APY
For example, if you lock up 100 tokens with 10% APY in a DeFi lending protocol, interest will be added (compounded) to the principal at regular intervals. This ensures that interest is calculated on the increased amount each time, resulting in more payouts at the end of the deposit term.
The formula for APY is (1 + R/N) N – 1. where ‘r’ is the interest rate and ‘n’ is his number of compoundings per year.
understand the difference
APY taps into the power of compound interest. Continue adding earned interest to your principal on a quarterly, monthly, weekly or daily basis. This feature is not available for APRs, which can have a large impact on your earnings amount over time.
Let’s say you deposit 10,000 TRX into a DeFi protocol. The platform offers 20% APR in exchange for the liquidity it provides. So after one year you will receive 12,000 TRX.
However, if the platform offers 20% APY compounded monthly, you will get 12,193 TRX at the end of the year. So just adding the effect of compounding will increase the interest earned by 193 TRX. If interest were compounded daily, this amount would be even higher, totaling 12,213 TRX.
APY offers significantly higher interest payouts in just one year compared to APR. This compounding effect can make an even bigger difference in the long run. This is why Albert Einstein called compound interest his eighth wonder of the world.
Conclusion
As someone in the crypto space looking to transfer or gamble digital assets for more income, it is important to know if the advertised earnings/interest percentage is APY or APR. A lower APY can yield higher returns than a higher APR, especially over the long term. It is also imperative to see if his APY as advertised is compounded on a monthly, weekly or daily basis. This can make a big difference in the total revenue provided.
First published: IST
.
