Skip to article
Degrees of SatoshiFollow the connections.
SearchTrace an address
Degrees of Satoshi/ Encyclopedia

Encyclopedia DeFi · Entry 146

APR versus APY: how compounding changes a displayed rate

AI-assisted research · separate automated verificationCorrections

Theme
DeFi
Sources
5 cited records
Reading time
About 3 minutes
Automated verification
Substantive update
In this article

At a glance

Key facts

Key facts for APR versus APY: how compounding changes a displayed rate
FactDetailSource
CompoundingReinvested earnings can themselves earn additional returns.[2]
Illustrative formulaFor a fixed nominal rate r compounded n times, annual yield is (1 + r/n)^n − 1.[2]
Protocol accountingAave’s cited math library distinguishes linear and approximated compounded-interest calculations.[3]
01

Compare the same principal and assumptions

At an illustrative fixed 12% nominal annual rate, monthly compounding gives (1 + 0.12/12)^12 − 1, approximately 12.68%. Without reinvestment, the simple one-year return on unchanged principal is 12%.

This arithmetic assumes a fixed rate, successful reinvestment and no costs. It is not a quote from a live pool.

02

Annualization is a projection of a rate or period

Lending rates can change with utilization and parameters. Multiplying a short period’s earnings into an annual figure does not establish what later periods will earn.

A protocol’s exact index formula can also differ from a dashboard’s display convention. Use the underlying calculation rather than only comparing two large percentages.

03

Separate earned assets from displayed reward value

A yield display may combine interest, trading fees and token incentives. Rewards denominated in a volatile token add a price assumption when displayed as a dollar percentage.

Show fees, reinvestment costs and whether rewards are automatically compounded. A higher headline figure can describe a different set of exposures.

Direct answers

Questions people ask

Does a 20% APY promise a 20% profit over the next year?

No. It describes a calculation under stated or implied assumptions. Rates, asset prices, costs and principal losses can change the realized outcome.

Inspect the evidence

The answer and key facts have stable claim links. These records retain the scope and qualification when reused.

APR commonly expresses a simple annualized rate, while APY includes an assumed compounding effect. Check the interface’s definition before comparing DeFi rates. Compare the calculation method, reward currency, reinvestment frequency and fees; neither label guarantees that a variable rate will persist for a year.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Compounding: Reinvested earnings can themselves earn additional returns.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Illustrative formula: For a fixed nominal rate r compounded n times, annual yield is (1 + r/n)^n − 1.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Protocol accounting: Aave’s cited math library distinguishes linear and approximated compounded-interest calculations.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Revision history
  1. — First publication after primary-source research and independent automated verification.

Source register

Sources and references

Retrieval dates and locators are recorded individually.
  1. Aave Docs GlossaryAave

    Protocol glossary distinguishes APY including compounding from APR and defines lending terms.

    Locator: APY; Borrow Cap; Credit Delegation; Debt Ceiling · Retrieved: 2026-10-02T17:58:05.650ZOpen source
  2. How does compound interest work?Consumer Financial Protection Bureau

    The arithmetic effect of compounding at a stated hypothetical rate.

    Locator: Compound interest; Examples · Retrieved: 2026-10-02T17:21:46.950ZOpen source
  3. Aave V3 MathUtilsAave

    Protocol-specific simple and approximated compounded interest calculations.

    Locator: calculateLinearInterest; calculateCompoundedInterest · Version / scope: aave-v3-core v1.19.3 · Retrieved: 2026-10-02T17:03:44.337ZOpen source
  4. DefiLlama: How we calculate TVLDefiLlama

    Provider-specific valuation scope and TVL methodology.

    Locator: Total Value Locked · Retrieved: 2026-10-02T17:03:46.209ZOpen source
  5. ReserveAave

    Reserve LTV, liquidation threshold, borrow availability, caps and rate parameters.

    Locator: Key Reserve Parameters; Dynamic Parameters and Governance · Version / scope: Aave V3 documentation · Retrieved: 2026-10-02T17:03:44.647ZOpen source
How this article was made

Research and drafting use AI assistance. A separate automated review checks claims against primary sources; no external expert or named human review is implied. Publication, substantive editing, source retrieval and verification are recorded separately. This version was independently checked by an automated reviewer on 2 October 2026.

Editorial method and corrections

Degrees of Satoshi editorial project. “APR versus APY: how compounding changes a displayed rate.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/apr-vs-apy/