What are APY and APR? APY, APR are basic concepts in the crypto market in general and DeFi in particular. We need to have a proper understanding of APY and APR to be able to calculate the profit we can earn from participating in Yield Farming. In this article we will learn what APY and APR are in the article below.
What Are APY And APR?
Overview of APY and APR
What is APR?
APR stands for Annual Percentage Rate which can be translated as Annual Profit Rate, That is, APR shows your interest rate over one year without compounding.
For example: You deposit 1,000 CAKE into PancakeSwap to participate in staking with a 10% APR, meaning each year you will receive 100 CAKE equivalent to 10% of the amount of CAKE you deposit into the protocol.
What is APY?
APY stands for Annual Percentage Yield, which means annual profit calculated by compounding profits, also known as compound interest..
For example: PancakeSwap says: “Send CAKE to PancakeSwap to receive up to 100% APY” which means the user’s interest is always added to the principal to participate in staking.
Normally, in DeFi protocols, APY will be used instead of APR because APY is higher and looks much more attractive than APR. And to calculate APY, you need a very detailed and much more complicated spreadsheet than calculating APR.
The formula to calculate APY is: APY = (1 + r/n)^n -1
Meanwhile: r is the interest rate (which is the APR) and n is the interest collection period
Difference between APY and APR
The biggest difference between APY and APR is that compounding. While APY uses compound interest to bring higher, more attractive returns, APR does not use compound interest.
Conclude
It can be said that understanding what APY and APR are helps us invest more effectively. There has been a lot of confusion about APR and APY causing investors to lose money.
