Yield products across DeFi and traditional finance display returns as either APR or APY. The difference between the two can make a 10% opportunity look like a 12% opportunity, so understanding the distinction is essential for comparing rates accurately and knowing what you're actually earning.

APR: simple interest

Annual Percentage Rate (APR) measures simple interest over a year with no compounding. If you deposit $10,000 at 10% APR, you earn $1,000 over twelve months. That $1,000 accrues evenly: roughly $83.33 per month, $2.74 per day.

The earned interest does not generate additional returns under APR. Your January earnings sit alongside your principal but don't start earning their own interest. At the end of the year, you have your original $10,000 plus $1,000 in earned interest.

APY: compound interest

Annual Percentage Yield (APY) accounts for compounding, where earned interest is reinvested and begins generating its own returns. The frequency of compounding determines how much difference this makes.

Using the same $10,000 at 10% with daily compounding: your January earnings get added to the principal, and February's interest is calculated on the higher balance. By the end of the year, you've earned approximately $10,515.58 instead of $10,000, for an effective APY of about 10.52%.

The difference between APR and APY grows larger at higher interest rates and with more frequent compounding. At 5%, the gap is small. At 50%, the gap becomes substantial.

Why this matters for DeFi yields

DeFi platforms are inconsistent about which metric they display. Some show APR. Some show APY. Some don't specify, leaving you to guess. Two platforms offering the same underlying return can look very different depending on which metric they use.

A platform displaying "12% APY" sounds better than one displaying "11.33% APR," but they might represent the exact same return if the first platform compounds daily. Without knowing which metric you're reading and what compounding frequency it assumes, you can't compare yields accurately.

How platforms inflate displayed yields

Some platforms auto-compound your returns (reinvesting earned interest back into the position automatically), and they display the compounded APY as the headline number. Others require you to manually claim and reinvest your earnings. If a platform shows 15% APY but requires manual compounding, you'll only achieve that rate if you reinvest frequently, and each reinvestment incurs a transaction fee that eats into your actual return.

Protocol incentive rewards add another layer of complexity. A platform might show 20% APY where 5% comes from actual lending interest and 15% comes from reward tokens valued at current market prices. If the reward token drops in value, your effective yield drops with it, even though the platform still displays the same headline number.

How to compare rates accurately

When evaluating yield opportunities, convert everything to the same metric. If you're comparing two lending platforms, check whether each displays APR or APY. If one shows APY with auto-compounding and the other shows APR with manual compounding, the direct comparison is misleading.

Ask these questions: What is the base APR from organic sources (lending interest, trading fees)? How often does compounding occur, and is it automatic? What portion of the displayed yield comes from token incentives, and how stable is that token's price? What fees will you pay for deposits, withdrawals, or claiming rewards?

The actual yield you receive is always the net number after compounding frequency, token price changes, and fees are factored in. A 15% headline rate that nets you 8% after accounting for these variables is still an 8% investment, regardless of what the marketing page says.

A practical rule

When in doubt, focus on the base yield from real economic activity (borrower interest payments, trading fee revenue, bond coupons) and treat incentive token yields as a bonus that may or may not persist. This approach gives you a conservative estimate of your expected return and protects you from being disappointed when incentive programs end or reward token prices decline.