📊 What Are APR and APY?
When you browse earn products on cryptocurrency exchanges, you'll see two key metrics: APR and APY. Understanding the difference between them is essential for making informed investment decisions and comparing products accurately.
APR represents the simple annual interest rate without considering the effect of compounding. It shows the base rate you earn on your principal over one year. APR does not include the reinvestment of earnings.
APY includes the effect of compounding — interest earned on your interest. It reflects the true annual return when earnings are reinvested (compounded) over time. APY is always higher than APR for the same nominal rate.
APR is what you earn on your initial deposit without reinvesting your rewards. APY is what you earn with reinvestment. APY is always higher because it includes the "interest on interest" effect — the magic of compounding.
🔄 How Compounding Works
Compounding is the process where your earned interest is reinvested to generate additional earnings. The more frequently compounding occurs, the higher your APY will be relative to APR.
Compounding Frequency Examples
| Compounding Frequency | APR | APY | Difference |
|---|---|---|---|
| Annually | 10% | 10.00% | 0.00% |
| Semi-Annually | 10% | 10.25% | +0.25% |
| Monthly | 10% | 10.47% | +0.47% |
| Daily | 10% | 10.52% | +0.52% |
| Hourly | 10% | 10.52% | +0.52% |
| Continuous | 10% | 10.52% | +0.52% |
Daily compounding (common on exchanges) vs. monthly compounding makes a difference, but the gap between daily and hourly is negligible. The most important factor is whether compounding happens at all — and how frequently.
📐 How to Calculate APY from APR
You can calculate APY from APR using a simple formula. Understanding this calculation helps you compare products accurately.
Step-by-Step Example
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1
Identify the APR
Let's use an APR of 10% (0.10).
-
2
Determine compounding frequency
Daily compounding means n = 365.
-
3
Apply the formula
APY = (1 + 0.10/365)^365 − 1
-
4
Calculate
APY = (1 + 0.00027397)^365 − 1 = 1.10516 − 1 = 0.10516
-
5
Convert to percentage
APY = 10.52%
For daily compounding (common on exchanges): APY ≈ APR + (APR² / 2) for small rates. For 10% APR, this gives ~10.5% APY — a good approximation.
🏦 APR vs APY on Major Exchanges
Different exchanges display different metrics. Here's how major platforms handle APR and APY.
| Exchange | Product | Displayed Metric | Compounding |
|---|---|---|---|
| Binance | Flexible Savings | APR | No (simple interest) |
| Binance | Locked Staking | APR | No (simple interest) |
| OKX | Earn (Flexible) | APY | Yes (daily) |
| OKX | Earn (Fixed) | APY | Yes (daily) |
| Bybit | Earn (Flexible) | APY | Yes (daily) |
| Bybit | Earn (Locked) | APY | Yes (daily) |
| KuCoin | Staking | APR | No (simple interest) |
| KuCoin | Pool-X | APY | Yes (variable) |
| DeFi Protocols | Yield Farming | APY | Yes (often compound) |
When comparing earn products, always compare APY (not APR) because APY reflects the true return after compounding. If an exchange displays APR, calculate the equivalent APY using the compounding frequency to make an apples-to-apples comparison.
📈 Why APY Matters for Your Returns
APY is the true measure of your returns because it includes compounding. Over time, the difference between APR and APY becomes significant.
| Time Horizon | 10% APR (No Compounding) | 10% APY (Daily Compounding) | Difference |
|---|---|---|---|
| 1 Year | $1,100 | $1,105.16 | $5.16 |
| 3 Years | $1,300 | $1,349.35 | $49.35 |
| 5 Years | $1,500 | $1,648.61 | $148.61 |
| 10 Years | $2,000 | $2,718.14 | $718.14 |
| 20 Years | $3,000 | $7,389.06 | $4,389.06 |
Over 20 years, a 10% APY (with daily compounding) generates $4,389 more than a 10% APR on a $1,000 investment. That's the power of compounding — and why APY is the metric that matters most.
❌ Common Mistakes When Comparing APR and APY
Avoiding these common mistakes will help you make better earn product decisions.
- Comparing APR to APY directly. This is like comparing apples to oranges. Always convert APR to APY (or APY to APR) before comparing.
- Ignoring compounding frequency. A product with 10% APR and daily compounding has a higher APY than one with 10% APR and monthly compounding.
- Assuming APY is always better. APY is higher, but it assumes you reinvest your rewards. If you don't plan to reinvest, APR is a more accurate measure of your actual return.
- Not reading product terms. Some products display APY but don't auto-compound — you need to manually claim and re-stake your rewards to achieve the APY.
- Forgetting about fees. Exchange fees (service fees) reduce your net APY. Always check the net rate after fees.
Always check the product's fine print: Is compounding automatic? Some products require you to manually claim and re-stake rewards to achieve the advertised APY. If you don't, your effective APY will be lower.