APR (Annual Percentage Rate) and APY (Annual Percentage Yield) both express yearly interest rates, but APR ignores compounding while APY includes it, making APY always equal to or higher than APR for the same underlying rate. With 12% APR compounded monthly, you earn 1% per month. 68% APY. 75% APY. With continuous compounding, the formula converges to e^r - 1.
DeFi typically quotes APY because blockchain protocols can compound automatically with each block, transaction, or epoch. A lending protocol showing 10% APY means your deposit grows by 10% annually with compounding already factored in. But beware of manipulation: some protocols quote APY assuming unrealistic compounding frequency or based on token emissions that will decline.
Always check whether quoted yields are APR or APY and what assumptions underlie the calculation. 12% APY. 5% APY. Understanding this distinction prevents comparing apples to oranges when evaluating yield opportunities across protocols using different conventions.