APY Vs APR

APY, or Annual Percentage Yield, and APR, or Annual Percentage Rate, are two different ways of expressing the cost of borrowing or the return on an investment. The primary difference is that APY takes into account the effect of compounding interest, while APR does not.

APR is a simple annual rate, whereas APY reflects the total amount of interest earned or paid over a year when compounding is included. In the cryptocurrency space, protocols often use these terms to market their yields, and it is crucial for users to understand which one is being presented.

An investment with a high APR but infrequent compounding might actually yield less than an investment with a lower APR but more frequent compounding. Failing to distinguish between the two can lead to significant errors in investment planning and financial decision-making.