What Is APY vs APR? Definition & Example

APR (annual percentage rate) is the simple annualised return with no compounding assumed. APY (annual percentage yield) assumes returns are continuously reinvested. On the same underlying rate, APY is always the larger number, and the gap widens sharply as the rate rises.

At modest rates the difference is cosmetic: 10% APR compounds to about 10.5% APY. At high rates it stops being cosmetic — 100% APR compounds to roughly 171% APY, and 1,000% APR to something that looks absurd because it is. Any protocol advertising a four-figure yield is quoting APY on an emissions rate that cannot persist.

Which number a protocol chooses to display is itself informative. Marketing departments prefer APY because it is bigger. Rates quoted without specifying which measure is being used, or without a compounding frequency, should be treated as marketing rather than data.

Two structural questions matter more than the headline figure. What is the yield paid in? A 200% APY paid in a token that falls 80% is a loss. Yields denominated in the protocol's own emissions are fundamentally different from yields paid in stablecoins or in fees generated by real usage. Where does it come from? Sustainable yield originates in trading fees, lending interest or staking rewards backed by actual demand. Unsustainable yield originates in token printing, and lasts exactly as long as the emissions schedule.

Applied to funding rates, the same care applies: an hourly rate annualises very differently from an 8-hourly one, and comparing venues without normalising the interval is off by a factor of eight.