APY vs APR

APR, Annual Percentage Rate, and APY, Annual Percentage Yield, both describe yearly interest. APR ignores compounding. APY includes it. For the same rate, APY is equal or higher. At 12% APR compounded monthly you earn 1% a month. After a year, (1.01)^12 = 1.1268, so 12.68% APY. Daily compounding at 12% APR is about 12.75% APY. Continuous compounding converges to e^r minus 1.

DeFi usually quotes APY because protocols can compound each block, trade, or epoch. A lending market showing 10% APY means the deposit grows 10% a year with compounding already in the number. Some protocols quote APY with unrealistic compounding or with token emissions that will fall. Check whether the figure is APR or APY and what assumptions sit under it. 12% APY. The gap is small. 5%.

Mixing the two when you compare protocols is how you pick the wrong yield. 68% APY. 75% APY. 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.