Understanding APR vs. APY in DeFi Yields

In DeFi, two terms that often come up when talking about yields are APR and APY. They sound similar, but they don’t represent the same thing. Knowing the difference can help you measure your true returns when farming or staking.

APR, or Annual Percentage Rate, is the return shown without taking compounding into account. For example, if you joined bitget launchpool just like the swtch with an APR of 60% offer and you stake $2,000, at the end of the year you would simply see $3,200 l, your original $2,000 bgb plus $1,200 swtch in profit. It’s a flat, straightforward way to measure returns, but it doesn’t consider reinvesting along the way.

APY, or Annual Percentage Yield, includes the effect of compounding. This is where your daily or weekly rewards are added back into your capital, and then they also start earning interest. If that same pool with a 60% APR compounded daily, your $2,000 could grow to around $3,500 by the end of the year. The difference comes from letting your profits continuously generate more profits.

This is why APY will always be higher than APR, because it assumes consistent reinvestment. For instance, if you were staking on a protocol with a 25% APR and started with $1,500, the simple APR calculation would give you $1,875 after a year. But with compounding, your balance could be closer to $1,950.

Most protocols today show both APR and APY. APR gives a baseline rate, while APY shows the potential if you actively or automatically restake rewards. Many DeFi aggregators now automate this process, making the APY more realistic, especially on chains with low transaction fees where frequent compounding is practical.