Annual Percentage Yield (APY) and Annual Percentage Rate (APR) are two key metrics for determining the returns from crypto staking or lending. Depending on your nature of investment and outcome expectations, you may come to a point when you’ll be required to decide to move on with either APY or APR. So, understanding the difference between these two terms is crucial to your investing strategy and to enhance your calculation method of crypto earnings.
Both APY and APR are used to calculate the payout for a variety of crypto activities, including lending, staking, and yield farming. However, these terms represent two different concepts of return calculator and may have different implications for your compensation.
Why Is It Essential To Understand The Difference Between APY And APR?
In the cryptocurrency business, you must understand the differences between APY and APR, as they can highly impact your financial prospects and your business outcomes. However, both metrics reflect compensation but their calculation methods are different, which can portray different outcomes, more precisely in the case of compounded returns. Understanding the contrast between these two technical terms enables you to make better investment decisions while optimizing your remuneration, and minimizing potential risks.
What Is The Annual Percentage Yield (APY)?
APY represents the genuine rate of compensation gained from savings or other types of financial activities over the course of a year., taking into account the impacts of compounding compensation.
In layman’s terms, compounding compensation refers to the compensation you receive on both your initial investment and the reward you continue to accumulate. This fundamental financial principle permits your wealth to grow over time, as you get compensated not just for your initial action but also for the earnings that your activity generates.
See Related: OneStake – A New Way to Maximize the APR in the DeFi Yield Market
What Is The Annual Percentage Rate (APR)?
APR is a widely used financial measure that serves as the annualized rate of a financial transaction or loan. It provides a consistent technique for analyzing various financial opportunities while ignoring the compounding effect of earning.
The APR is determined as a simple rate, which means it doesn’t take into account any compensation gained on previously accrued earnings. This makes it a useful tool for determining basic remuneration from financial activities. However, it may not paint a complete picture when compared it with different compounding earning methods.
APY Vs. APR In Cryptocurrency
In cryptocurrency, the APR is the proportion that an investor expects to earn as a fixed interest on their investment like lending it or making it available for loans. It takes into account various costs that a borrower must pay but excludes compound interest.
The APR is the standard interest rate paid to the principal amount of an investment or loan. Since APR reflects an annualized rate, prorated interests will be paid if an investment or loan is held for a shorter term. For example, a six-month investment at 5% APR yields only 2.5% of the principal amount.
APY represents the rate of return on a cryptocurrency investment. Unlike APR, APY takes into account compound interest as well as regular interest. The amount earned on the original investment plus interest is referred to as a compound interest. This is why APY generates more profit than APR.
Investors may generate an APY by staking their digital currency and via yield farming to provide liquidity or liquidity pools. They can also earn an APY by keeping their crypto assets in savings accounts.
