The Subtle Difference Between APY and APR and Why You Should Understand

I saw a thread the other day about how you can ‘stake’ your Moons, while in actuality, it was a liquidity pool. So, there seems to be some confusion on what staking actually is. In that thread (and others), a lot of people seem to use ‘APR’ and ‘APY’ interchangeably – so I thought I’d make a thread on the difference between the two, as it could help some people clear up some confusion.

APR Made Simple:

Imagine this as a quick estimate of how much extra cash your starting investment could churn out in a year. Let's say you threw in £900 into Ethereum with a 4% APR. By end of year, you might be looking at around £936 (£900 x (1.04) = £936).

But here's the catch: this supposes a single payout of £36 at the year's end for all the interest. But, when staking crypto, you usually get cash-ins more often. Some platforms even reward you every week or every single day. So, if we're talking about daily payouts, the interest you get each day is just the APR divided by 365, because there are 365 days in a year. This daily interest rate works out to:

4%/365 days = 0.0109589% interest per day.

After the first day, you're sitting at:

£900 x (1 + 0.04/365) = £900.0109589.

Moving on to the second day, you still get that same 0.0109589% in daily interest, but it's not based on the original £900 you put in. It's figured out based on what you've got staked after day one, which is now £900.0109589. So, after you pocket your interest on day two, you'll have:

£900.0109589 x (1 + 0.04/365) = £900.021922.

This cycle just keeps going. Every day, your money grows just a bit, and as a result, the interest you earn creeps up a bit each day too. This is called compound interest, and that's where APY comes in.

APY Made Simple:

APY sums up the interest you pocket in a year, considering compound interest. Basically, it's the interest taking into account that you're getting paid on the interest you earned throughout the year. So, if you're dealing with that 4% APR and you're cashing in on your interest every day, the APY calculation goes like this:

APY = (1 + 0.04/365)^365 - 1 = 4.141419037%.

That means over a year, you're actually earning 4.141419037% in interest, not just the 4% that the APR told you upfront. So, after a full year, your earnings would be:

£900 x (1.04141419037) = £938.27.

APR Estimation after a year:

£936.

APY Estimation after a year:

£938.27.

Notice the slight gap in these numbers? APY gives you a better picture of what you might end up with in interest by the end of the year.