Compare rates on the same basis
APR and APY describe the same money differently β compounding is the gap. Convert before comparing any two offers. See the growth over time on the compound interest calculator.
APY and APR are not interchangeable
APR is the simple annual rate. APY includes compounding. A 20% APR compounded daily becomes 22.13% APY β same underlying rate, different number, and marketing teams know exactly which one looks better.
DeFi protocols almost always advertise APY, because compounding inflates the figure. A "40% APY" pool is roughly 33.6% APR compounded daily. If rewards need manual claiming and you claim monthly, your real return sits closer to the APR than the advertised APY β the compounding assumption baked into the big number requires constant reinvestment you probably aren't doing.
The formula: APY = (1 + APR/n)^n β 1, where n is compounds per year. The gap grows with the rate: at 5% APR the difference is trivial (5.13% APY), at 100% APR daily compounding gives 171% APY. The bigger the promised number, the more the compounding math flatters it.
FAQ
What is the difference between APR and APY? APR is the simple annual rate with no compounding. APY includes compounding, so it is always higher for the same underlying rate. A 12% APY compounding daily is about 11.3% APR.
Why does it matter which one is quoted? Because platforms advertise the flattering one: high APY for what you earn, low APR for what you pay. Converting to a common basis is the only way to compare two yields or two loans honestly.