What is APY and APR in Crypto?
APY and APR are two terms commonly used in the world of finance and cryptocurrency. In simple terms, they are rates of return that are used to measure the performance of an investment. However, they have a few key differences that are important for investors to understand.
APY (Annual Percentage Yield)
APY is the rate of return that an investor can expect over a year from an investment that compounds interest. It takes into account the effect of compounding interest on an investment. Compounding interest is when the interest earned on an investment is reinvested and added to the principal amount, resulting in the earning of interest on interest. APY is important for investments such as savings accounts, bonds, and other fixed-income products.
For example, if an investor invests in a savings account with a 5% APY and deposits $1000, the account would be worth $1,050 after one year with compounding interest. This means that the investor earned a 5% return on their investment.
APR (Annual Percentage Rate)
APR is the interest rate charged on a loan or credit card, excluding any fees or compounding interest. It does not take into account the impact of compounding interest on an investment. APR is an important measure for loans, mortgages, and credit cards.
For example, if an investor takes out a loan with a 10% APR and borrows $10,000, they would be charged $1,000 in interest over a year, without taking into account any fees or compounding interest.
APY vs APR in Crypto
In the world of cryptocurrency, APY and APR are used to measure the returns of various investment products such as staking, liquidity pools, and lending platforms.
APY is used to measure the returns of investments that use compounding interest such as staking rewards. Staking rewards are earned by holding and validating transactions on a blockchain network. The rewards earned are then added to the principal investment, earning interest on interest. APY is also used to measure the returns of liquidity pools, where users provide liquidity to decentralized exchanges and earn a percentage of the trading fees generated by the exchange.
APR is used to measure the returns of lending platforms where investors can lend their cryptocurrency to others and earn interest on their investment. APR does not take into account the impact of compounding interest on the investment. APR is also used to measure the returns of borrowing platforms, where borrowers can borrow cryptocurrency with interest rates and pay back the loan with interest.
Conclusion
APY and APR are both important measures of returns in the world of finance and cryptocurrency. APY takes into account the effect of compounding interest on an investment while APR does not. Investors should be aware of the difference between the two rates and what they are used for when making investment decisions.
