Is APY better than APR?

Neither is better; they measure differently. APY includes compounding and APR doesn't, so for the same underlying rate the APY figure is always the larger number. What matters is knowing which one you're being shown.

How do I convert APR to APY?

Divide the APR by the number of compounding periods per year, add 1, raise that to the number of periods, then subtract 1. Or skip the algebra and use our calculator, which does it instantly.

Why are DeFi APYs so much higher than bank rates?

Mostly because many farms pay rewards in tokens they print themselves, which lets the advertised rate be huge while the reward's real value is shaky. Higher risk is doing the heavy lifting, not generosity.

Does compounding frequency really matter?

It matters up to a point. Moving from yearly to monthly compounding adds a noticeable amount; moving from daily to hourly adds almost nothing. The gains shrink with each step up in frequency.

Is the APY a farm shows me guaranteed?

No. It's a snapshot based on current conditions, and it changes as deposits, emissions, and token prices change. Treat any displayed APY as this hour's weather, not a contract.

What's a realistic yield in DeFi?

There's no fixed answer, but as a teaching range: single digits from staking and lending is common, while anything far above that usually depends on a volatile reward token. The higher the number, the shorter its life expectancy.

APY vs APR: Small Letters, Big Difference — Zabu Finance

Two acronyms, one common trap

Every yield app greets you with a percentage. Sometimes it's labeled APR. Sometimes APY. They look like twins, and most people treat them as the same thing.

They're not. At small rates the gap is pocket change. At DeFi-sized rates it grows big enough to change decisions. And apps know exactly which number looks better on a banner. Hint: it's the one with the Y.

Ten minutes with this article and you'll never confuse them again. That's a better return than most farms offer.

APR: the flat rate

APR stands for annual percentage rate. It's simple interest: the rate applies to your starting amount only, spread across a year.

Put $1,000 into something paying 20% APR and you earn $200 a year — about 55 cents a day. Your rewards pile up beside your deposit, but they never earn anything themselves. The pile grows in a straight line.

You've met APR before, even outside crypto. Credit cards, car loans, and mortgages quote APR. In DeFi, lending apps and many staking pages quote APR too, because it describes the raw reward stream before any reinvesting.

One nice thing about APR: it slices cleanly. Divide by 12 for the monthly rate, by 365 for the daily one. That makes it the better number for comparing offers side by side.

APY: the snowball rate

APY stands for annual percentage yield. It assumes every reward gets reinvested, so your rewards start earning rewards of their own. That's compounding — a snowball rolling downhill, packing on snow as it goes.

How often the snowball gets packed matters. Monthly compounding beats yearly. Daily beats monthly. Each extra cycle helps a little less than the one before, though, so daily and hourly end up nearly identical.

Same rate, different label: 20% APR compounded monthly works out to about 21.94% APY. Nothing about the deal changed. Only the math stacked on top of it did.

So when two apps show different numbers for the same pool, check the labels before assuming one app pays more. Half the time, one is quoting APR and the other is quoting APY on the identical reward stream.

The worked example: $1,000 at 20%

Watch one deposit live two lives. The middle column is 20% APR with no compounding. The right column is the same 20% APR compounded monthly — which is what a farm would advertise as roughly 21.94% APY.

Time	Simple, 20% APR	Compounded monthly
Start	$1,000.00	$1,000.00
Month 3	$1,050.00	$1,050.84
Month 6	$1,100.00	$1,104.26
Month 9	$1,150.00	$1,160.40
Month 12	$1,200.00	$1,219.39

After one year the gap is $19.39. Underwhelming, right? Now stretch the clock. Left alone for five years, the simple deposit reaches $2,000 while the compounded one passes $2,690. Compounding is quiet early and loud late — that's its whole personality.

Want to test your own numbers? Our yield farming calculator runs this exact math for any amount, rate, and compounding schedule, and shows both paths side by side.

Why farms advertise APY

DeFi farms almost always display APY, often assuming you re-stake rewards every single day. Daily compounding turns 20% APR into about 22.1% APY. It turns 100% APR into about 171% APY. Big rates inflate beautifully, and banners love big rates.

Three quiet catches hide inside that shiny number:

Someone has to do the compounding. If the farm doesn't auto-compound, that APY assumes you show up and re-stake constantly, paying gas each time.
Rates move. The APY you see is a snapshot. More depositors arriving, or the reward token slipping, can cut it in half by the weekend. Since printed reward tokens are how most yield farms pay, this happens a lot.
The unit matters. A 200% APY paid in a token that drops 90% is a loss wearing a party hat. Percentages don't protect you from prices.

None of this makes APY dishonest, exactly. It's just the most optimistic honest number available, and it gets used accordingly.

Small letters, big difference — using this in practice

Build one habit: translate before you judge. When you see APY, ask what the flat APR is and how often compounding really happens. When you see APR, remember your true take can run a bit higher if you reinvest. Then convert the percentage into dollars per month on the amount you'd actually deposit. Dollar figures cut through hype in a way percentages never do — $8 a month sounds different from "10% APY!" even when they're the same thing.

Every rate in this article is a teaching example, not an offer or a forecast — the standing rule for everything on this site. And if you'd rather start with slower, steadier yield while these ideas settle in, staking is the classic first step.