If you’re familiar with DeFi products, you’ve probably heard of APR and APY, two similar-sounding terms. But have you ever wondered what they meant and what the difference between them is?
Holding assets and earning from them is a common practice in crypto, but many users are unsure whether they should lend their assets for annual return or annual yield.
Both APY and APR are fundamental when it comes to financing. They are important terms for calculating returns from various cryptocurrency investments and loans. These investments may include providing liquidity on exchanges, yield farming, staking, and crypto savings accounts.
Different investments may offer returns based on APR or APY, and crypto investors must understand the difference between these two concepts to make informed investment decisions and optimize their returns.
The annual percentage rate, or APR, is the percentage you can expect to earn as interest on your investment for staking to secure a network, lending, or making your crypto available for loans. Another name for APR is simple interest because there is no compounding involved.
For example, if Jarrod invests $10,000 in a savings account with an APR of 10%, Jarrod will earn $1000 in interest after a year. Interest is calculated by multiplying the original amount (principal) by the APR.
APR is a straightforward concept. Let’s take another example of staking 1000 $ATOM. If the APR on the staking platform is 20%, then you should earn 200 $ATOM in addition to your initial investment if you remain staked for exactly a year. Your investment should now total 1200 $ATOM, which comprises the 1000 $ATOM principal and the 200 $ATOM in interest earned from the 20% APR.
APY measures the total return expressed as a percentage, and unlike APR, it takes into account the effect of compound interest.
Compound interest is the amount earned on your principal investment and the interest. In short, compound interest refers to the interest you earn on previously earned interest.
The more frequent the compounding, the higher the return will be. APY takes into account the frequency of compounding, making it a more accurate measure of the potential return on your investment.
To convert APR to APY, Use the formula:
APY = [1 + (APR / number of periods)]^ (number of periods) — 1
*where the number of periods is how often it’ll be compounded (daily, weekly, monthly, etc.)
When comparing returns using APR and APY, the only difference is how the interest is compounded. APY will always result in a higher overall return when all other factors, such as the original investment, time duration of investing, and interest rate, are equal.
This means that when borrowing money, it’s best to consider the APR, while when investing, it’s best to look for investments with higher APY rates to maximize overall earnings.
Majority of our products fall under the category of staking, as it represents one of the biggest investment opportunities in the crypto and DeFi space for TradFi investors. The rewards structure of staking is similar to dividends, a concept that TradFi investors are familiar with and find appealing.
Regarding staking, there are two main categories of products on Rebuschain — direct and layered. The direct staking product is about staking your $REBUS and earning passive returns on your investment. APR on the staking platform is 197% at the time of writing.
Also, our layered staking products will support staking other coins, like $ATOM, $JUNO, or $OSMO, and still, earn passive returns.
Soon, you’ll be able to stake $REBUS and earn $LUDUS, which will give you access to any Play-to-Earn content on Rebuschain.
It’s important to understand whether profits or payments are based on APR or APY when investing or borrowing, especially in the crypto market. The crypto market is known for offering high returns compared to traditional finance, but it also comes with higher risks. Knowing the difference between APR and APY can help you make more informed investment decisions.
The Rebus team is fully committed to making DeFi accessible to mainstream investors. DeFi has the potential to revolutionize the financial industry, and we want to be a part of that change. We understand that for DeFi to reach its full potential, it must be easy for the average person to access and understand. Therefore, we are constantly developing user-friendly products and services that make it easy for anyone to start investing in DeFi.
We are also dedicated to educating our community and the public about DeFi, its benefits, and how it can be used to enhance their financial well-being. We believe that by making DeFi accessible to the masses, we can help to create a more equitable and decentralized financial system for all.