APR and APY, what are the differences between them for the calculations of profitability in stake or farms DeFi of cryptocurrencies. These are two terms that we always find in any platform or DApp related to decentralised finance.
We will try to explain in a simple way these two concepts to better understand how they work and also what benefits they can bring us.
APY (Annual Percentage Yield)
Or Annual Percentage Yield is the real rate of return obtained from a savings deposit or an investment taking into account the effect of compound interest.
Unlike simple interest, compound interest is calculated periodically and the amount is immediately added to the balance. As each period progresses, the account balance increases a little, so the interest paid on the balance also increases.
Compound interest refers to a method of continuously reapplying interest. This interest is applied to an amount (known as the principal) that will grow over time.
The formula for calculating compound interest is as follows:
APY = (1 + periodic rate) * number of periods – 1
In this formula APY, 1 is the amount deposited. So, if you deposited $100 for one year at 11% interest (0.03% daily) and your deposit is calculated daily, at the end of the year you would have $111.57. If you had paid simple interest, you would have had $111.
Basically, we could say that the APY or annual percentage rate takes into account compound interest, while the APR or annual percentage rate does not.
APR (Annual Percentage Rate).
Importantly, if the interest is reinvested annually and no fees are present, the APY and APR are exactly the same.
APY vs. APR
In small amounts perhaps and in the short term, it may not seem like a big difference. But when we talk about medium and long term the APY makes your investment soar against the APR.
In addition, with the APY you can forget about your investment, you don’t have to think every day about how much you have generated. And your capital will always be 100% generating profits. In the APR, the profits generated remain pending to be claimed, and do not generate rewards.