APR or Annual Percentage Rate represents the expected annual return from staking your tokens.
It gives you a rate that is easily comparable to the returns on other protocols.
The APR does not take into account the compounding effects of restaking your rewards.
In comparison, APY or Annual Percentage Yield is the expected annual compound return, expressed in percentages.
This includes both the interest on the initial amount invested and the compound interests on the rewards you receive from staking. In other words, you earn additional interst on your interests.
Let's say you have a 1000 tokens of a particular digital asset that you want to stake.
You can choose between two protocols that will pay interests on a weekly basis.
- Protocol A offers an APR of 10% for staking your tokens over 1 year.
- Protocol B offers an APY of 10% for staking your tokens over 1 year.
How much will you earn after 1 year?
Protocol A: At the end of the year you will have a total of 1100 tokens.
- (1000 * 1.10 = 1100)
Protocol B: At the end of the year you will have a total of 1105.065 tokens.
- Calculating weekly percentage rate: 10% on year basis / 52 weeks = 0.192308 or 0.00192308%
- (1000 * (1.00192308)^52 = 1105.065)
The reason Protocol B is a better investment is because the APY includes the rewards paid in previous periods. With Protocol A, interests are only calculated on the initial amount invested.
Depending on how often you claim and restake your rewards, your APY will differ. You can calculate your own APY via this link