Key Differences Between APY and APR
1. Definition:
- APR (Annual Percentage Rate): This is the simple interest rate calculated on your initial investment over a year. APR does not account for compounding interest.
- APY (Annual Percentage Yield): APY includes the interest rate and the effect of compounding, which means it reflects the additional interest earned as the interest itself is reinvested over time.
2. Compounding:
- With APR, you earn interest on your original principal only. For example, if Binance offers 5% APR on a staking pool, you’ll receive 5% interest on the initial amount, assuming none of the interest is reinvested.
- APY takes into account the compounding frequency. For example, if Binance compounds your staking rewards weekly, the interest earned each week is added back to your principal, meaning future interest is calculated on this larger amount. This will give you a higher total return compared to APR.
3. Simple Example:
- Let’s say Binance offers a 5% APR on staking BNB. If Binance compounds rewards weekly, the APY might be around 5.12%. The small increase happens because APY accounts for the compounding effect.
4. Which is Higher?
- APY is always higher than or equal to APR because of compounding. The more frequently the interest is compounded (daily, weekly, monthly), the larger the difference between APY and APR.
5. When to Use APR vs. APY:
- APR is useful for comparing simple interest rates, such as when borrowing or lending without compounding.
- APY is better when comparing investment returns, such as staking or yield farming, where compounding plays a role.
Binance-Specific Example:
- On Binance, when you stake tokens (e.g., BNB or USDT), you’ll often see both APR and APY displayed. The APY will typically be higher because it includes the effect of compounding.
- For staking products on Binance, it’s important to check the compounding frequency to fully understand how much you can earn.
