APR vs APY in Crypto Staking

In simple terms, staking involves holding a certain amount of cryptocurrency in a digital wallet to support the operations of a blockchain network. In return for staking their coins, participants earn rewards.

APR:
APR stands for Annual Percentage Rate. In crypto staking, APR refers to the interest rate that you earn on your staked coins over a one-year period. It is typically expressed as a percentage and represents the nominal interest rate without taking into account the compounding effect.

APY:
APY stands for Annual Percentage Yield. APY takes into consideration the compounding effect, which means that the interest you earn is reinvested, leading to exponential growth of your earnings. APY reflects the actual return on your investment over a one-year period, including the effects of compounding.

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The calculation of APR is relatively straightforward. It is calculated by multiplying the daily interest rate by the number of days in a year. However, APY takes compounding into account. To calculate APY, you need to consider the frequency of compounding, which could be daily, monthly, quarterly, or annually. The more frequent the compounding, the higher the APY will be.

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Consider an example to highlight the distinction between APR and APY

Imagine depositing your cryptocurrencies in a crypto savings account with an interest rate of 1% per month. This implies that your assets are subjected to an APR of 12% (calculated as 0.01 multiplied by 12).
If you deposit $1,000 of cryptocurrencies into this account, after one year, you would accumulate $1,120 (calculated as 1,000 multiplied by [1 + 0.12])
Now, let's revisit the same scenario, but this time assume that the platform offers a 1% interest rate per month with compound interest paid monthly. In this situation, your assets are exposed to an APY rate of 12.68% (computed as [1 + 0.01]¹² – 1).
Similarly, if you deposit $1,000 of cryptocurrencies into this account, after one year, your total would be $1,268 (calculated as 1,000 multiplied by [1 + 0.1268]).

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Choosing between APR and APY in crypto staking ultimately depends on your investment goals and risk tolerance. If you prefer a more predictable and stable income, APR may be the better option for you. However, if you are looking for higher overall returns and are comfortable with the potential fluctuations in earnings, APY could be the way to go.

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For More: APR vs APY in Crypto Staking: Key Differences Explained