APY incorporates interest compounded quarterly, monthly, weekly, or daily, while APR doesn’t. It’s important to understand how these two metrics are calculated and what it means for the returns that you can earn on your digital funds over time ⬇️
You have likely seen these two similar-sounding terms, APY and APR, when looking into decentralized finance products.
Before getting into annual percentage yield , let’s first understand what compound interest is. Put simply, it means earning interest on the previous interest. In the example above, if the financial institution pays interest to your account monthly, your balance will look different during each of the twelve months of the year.
The power of compounding is more impressive over more extended periods. After three years, you would end up with $19,309 with the same 20% APR product with daily compounding. That’s $3,309 more interest earned than that same 20% APR product without compounding. In sum, APR is a simpler and more static metric: It’s always quoted as a fixed yearly rate. But APY incorporates interest earned on interest, or compound interest. It changes according to the compounding frequency. One way to memorize the difference is to remember that “yield” has five letters and also represents the more complex concept .From the example above, you can see that more interest can be earned when interest is compounded.
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