APR vs APY in Crypto: How Compounding Changes Your Actual Yield
Cryptocurrency staking platforms advertise returns using APR and APY interchangeably, but they're fundamentally different.
A platform offering "10% APY" might actually advertise "10% APR" elsewhere—same platform, different yield—because most users don't understand compounding.
This confusion costs crypto investors thousands in unrealized gains because they don't reinvest rewards, missing the compounding advantage entirely.
Understanding APR vs APY in Crypto Staking
APR (Annual Percentage Rate):
Simple interest calculation (no compounding)
10% APR means you earn 10% annually on principal only
Rewards are NOT reinvested
Formula: Annual Return = Principal × APR
APY (Annual Percentage Yield):
Includes compound interest effect
10% APY means your actual return exceeds 10% due to reinvestment
Assumes rewards are reinvested continuously
Formula: APY=(1+rn)n−1APY=(1+nr)n−1 where r = rate, n = compounding periods
The Real Difference: A Concrete Example
Scenario: $10,000 staked for 1 year
10% APR (no compounding):
Year 1 reward: $10,000 × 10% = $1,000
Year 1 total: $11,000
Simple, straightforward math
10% APY with monthly compounding:
Monthly rate: 10% ÷ 12 = 0.833%
Month 1: $10,000 × 0.00833 = $83.30 reward
Month 1 total: $10,083.30
Month 2: $10,083.30 × 0.00833 = $83.99 reward
Month 2 total: $10,167.29
(Continue through month 12...)
Year 1 total: $11,047 (vs $11,000 with APR)
Difference: $47 additional earnings from compounding
For $10,000, the difference is modest ($47). But for larger amounts and longer periods, compounding becomes significant.
The Compounding Frequency Impact
APY depends on how often rewards compound:
Same 10% annual rate, different compounding:
Annual compounding: APY = 10.00%
Semi-annual: APY = 10.25%
Quarterly: APY = 10.38%
Monthly: APY = 10.47%
Daily: APY = 10.52%
Continuous: APY = 10.52%
Real implication: A platform offering 10% APY with monthly compounding actually yields LESS than one offering 10% APY with daily compounding—despite the same percentage.
Always check compounding frequency when comparing platforms.
Why This Matters More in Crypto Than Traditional Finance
Crypto staking often includes very high APY rates (20-50%+ on alternative tokens):
High-rate example: 30% APY on altcoin, daily compounding
Daily rate: 30% ÷ 365 = 0.082% per day
After 1 year: (1.00082)^365 - 1 = 35.7% actual return
Compare to 30% APR (no compounding):
After 1 year: 30% return
The APY gives 5.7 percentage points HIGHER return than APR
This difference becomes dramatic with reinvestment:
Year-over-year growth at 30% APY (daily compounding):
Year 1: $10,000 → $13,570
Year 2: $13,570 → $18,380
Year 3: $18,380 → $24,933
Year 5: $10,000 → $45,868
Versus 30% APR (no compounding):
Year 1: $13,000
Year 2: $16,000
Year 3: $19,000
Year 5: $40,000
Over 5 years, APY compounding generates $5,868 more from the same $10,000 investment
The Critical Assumption: Rewards Must Be Reinvested
Here's the catch: APY assumes you reinvest all rewards
If a platform offers 30% APY but you withdraw rewards monthly without reinvesting, you only earn 30% APR (simple interest).
Real-world scenario:
Platform advertises: "30% APY"
You stake $10,000
Month 1 rewards: $247
You withdraw $247 (spend it)
Month 2 rewards: $247 (not $248.61 with compounding)
You're earning APR, not APY, because you didn't reinvest
To capture APY benefits: Leave rewards staking and let them compound
When Platforms Conflate APR and APY
Many crypto platforms list "30% APY" when they mean 30% APR:
The deceptive practice:
Calculate: Principal × Rate = Annual Return
Advertise as "APY" even though it's simple interest
Unsuspecting users think they're getting compound interest
Reality: They're earning APR
How to verify:
Ask the platform: "What's your compounding frequency?"
If they say "No compounding, it's distributed weekly," they're misleading you with APY terminology
Real APY includes compounding by definition
The Practical Calculation: Converting APR to Actual APY
If a platform offers 12% APR (explicitly no compounding), calculate actual APY if you reinvest:
APY=(1+0.1212)12−1=1.0112−1=12.68% actual APYAPY=(1+120.12)12−1=1.0112−1=12.68% actual APY
If you reinvest monthly, your effective return is 12.68%, not 12%.
Comparison: Selecting Staking Platforms Platform Rate Type Compounding Actual Annual Return on $10K Kraken 10% APY Monthly $10,471 Coinbase 10% APR None $11,000 Lido 15% APY Daily $16,140 Yearn 12% APR Manual $11,200 (if reinvested)
Same rate, dramatically different outcomes based on type and compounding.
The Bottom Line: APY Requires Reinvestment to Deliver Higher Returns
Crypto platforms advertise APY because it sounds better than APR.
But APY only delivers if you:
Leave rewards staking (don't withdraw)
Let compounding work over time
Understand the compounding frequency
If you withdraw rewards monthly, you're earning APR regardless of advertised APY.
For long-term stakers who reinvest, APY delivers meaningful additional returns through compounding.
The difference between 30% APY and 30% APR becomes $5,000-$10,000+ on significant holdings over 3-5 years.