At about 09:30 UTC on 31 October 2026, DefiLlama’s yield tracker listed a WHYPE-USDC blockchain that runs exactly as written when it is called, holding and moving funds according to its code, without an intermediary able to change the outcome.">smart contract holding reserves of two or more tokens, supplied by users, that a decentralized exchange uses to execute trades automatically at a price set by a formula.">liquidity pool on Hyperliquid at 61.15% and USDC lent on Aave’s Ethereum market at 5.43%. Both figures sat in the same column, under the same three letters: APY. They describe very different things. DefiLlama counted the first entirely as token rewards. The second came from borrowers, and over the previous 30 days it had averaged about a point less.
APR vs APY looks like a question of vocabulary, and the vocabulary takes five minutes to learn. APR is a yearly rate without compounding. APY is the same rate once interest earns interest. The harder part is what the label leaves out: what is being compounded, which token pays, over which window the number was measured, and what remains after costs. A beginner who can answer those four questions reads a yield page better than one who only knows the formula.
This lesson follows our guide to where DeFi yield comes from, which separates fees, interest, token emissions and points. Here the subject is narrower: how the number on the screen is built, and how much of it reaches you. Nothing below ranks a product or recommends a deposit.
APR vs APY: one rate, with and without interest on interest
APR stands for annual percentage rate. In DeFi, it is the simple yearly rate: the money earned over 12 months if the interest is never added back to the balance. APY stands for annual percentage yield. It is what the same rate produces if each interest payment joins the balance and starts earning too.
When a page shows an APR, it has stopped the count before compounding. When it shows an APY, it has assumed a compounding schedule, whether or not anyone will really carry it out.
Compounding in one worked example
Example: you hold 1,000 dollars at 10% APR. Without compounding, you collect 100 dollars over the year and finish on 1,100. Now credit the interest every month instead. The rate for one month is 10% divided by 12, or 0.833%. After month one you have 1,008.33 dollars. Month two pays 0.833% on that larger sum, which comes to 8.40 dollars rather than 8.33.
The difference is tiny on any single month, and it keeps feeding itself. After 12 months the balance reaches 1,104.71 dollars, which means a 10% APR compounded monthly is an APY of 10.471%. You gained 4.71 dollars from interest on interest, with nothing added to the deposit.
How to calculate APY: the formula, and why the gap grows with the rate
The conversion fits in one line. With APR written as a decimal and n the number of compounding periods per year:
APY = (1 + APR / n)^n - 1Take 8% APR compounded daily, so n = 365. The sum gives 8.328%, or 83.28 dollars on 1,000 instead of 80. If compounding were continuous, the formula would become e^APR – 1, a ceiling that daily compounding already comes close to.
APY by compounding frequency
These figures are pure arithmetic, computed for this lesson, and they do not depend on any market.
| APR | Yearly | Quarterly | Monthly | Weekly | Daily | Continuous |
|---|---|---|---|---|---|---|
| 5% | 5.000% | 5.095% | 5.116% | 5.125% | 5.127% | 5.127% |
| 10% | 10.000% | 10.381% | 10.471% | 10.506% | 10.516% | 10.517% |
| 20% | 20.000% | 21.551% | 21.939% | 22.093% | 22.134% | 22.140% |
| 100% | 100.000% | 144.141% | 161.304% | 169.260% | 171.457% | 171.828% |
Read the table from left to right, then from top to bottom. At 5%, moving from yearly to continuous compounding adds 0.13 of a point. At 100%, it adds 71.8 points. Compounding matters little on modest rates and enormously on extreme ones, which is why the biggest gaps between the two labels tend to appear on the riskiest pages, where a rate rarely stays put for long enough to compound at all.
The table also answers two questions readers ask. APY is never lower than APR for the same rate, and the two are equal only when interest is credited once a year. So “which is better, APR or APY” has no meaning on its own: they are two ways of writing one rate. A 9.6% APR compounded monthly and a 10% APY are almost exactly the same deal.
Going backwards, from APY to APR
To compare a page that shows APY with one that shows APR, turn the formula around:
APR = n x ((1 + APY)^(1 / n) - 1)A 10% APY compounded monthly equals a 9.569% APR. The catch is n. If the page does not say how often interest compounds, you cannot convert exactly, and you should treat its APY as an assumption.
Banks use the same letters for something else
Part of the confusion comes from borrowing. In a mortgage or a loan, APR does not mean “no compounding”. It means the cost of the credit with fees included. In the words of the US Consumer Financial Protection Bureau, “An annual percentage rate (APR) reflects the mortgage interest rate plus other charges.” (CFPB). That is why a loan’s APR is usually higher than its interest rate, and why “APR vs APY” on a mortgage and in a lending pool are different conversations.
APY has a legal meaning for US savers. Under the Truth in Savings rules, Regulation DD defines it as a percentage showing all the interest an account pays over 365 days, given its rate and how often that rate compounds. Appendix A gives the formula and an example: a 1,000-dollar NOW account that pays 61.68 dollars in 365 days has an APY of 6.17%.
British savers see AER instead. The FCA’s December 2023 cash savings update describes it as reflecting what a product pays over the year, “taking into account any compounding interest, bonuses, and charges”. French and Italian borrowers meet the same idea under other names. In France the TAEG is the all-in yearly cost of a loan, with fees and compulsory insurance on top of interest, as the Banque de France’s ABE Infoservice site explains. In Italy the Banca d’Italia separates the TAN, the yearly interest, from the TAEG, which takes in every cost of the loan.
In a bank, the letters come with a definition and a formula attached to the product. On a DeFi interface, read the label as the protocol’s own choice and look for how it was computed. Do not assume that a website uses the bank formula.
How DeFi protocols build the number: APR vs APY in crypto
Take Aave, the example most readers meet first. Its contracts store a yearly rate that is not compounded, in other words an APR, and the source code divides that rate by the 31,536,000 seconds of a 365-day year. The APY comes from the formula above with n set to that number: Aave’s developer guide for version 2 says the rate shown on its front end “is compounded per second”, and its math library, archived in April 2026, does the same with version 3 rates. For instance, a 5.30% APR becomes about 5.44% that way.
The mechanics differ by side. Aave’s reserve logic accrues supply interest linearly between two updates of the market and borrow interest with a compounding approximation, so even the same protocol treats the two sides differently. For how those rates arise, see our lesson on crypto lending and borrowing.
A Morpho vault adds a layer. Allocators appointed for the vault spread deposits across lending markets, and Morpho’s documentation for Vault V2 allows a performance fee of up to 50% on yield and a management fee of up to 5% on total assets. Those are ceilings, and each vault sets its own. So ask whether a vault’s figure comes before or after that fee. staking means depositing a proof of stake coin with a protocol that stakes it for you and issues a transferable token (such as Lido stETH or rETH) representing the deposit plus rewards, which you can use or sell while the coins stay staked.">Liquid staking is another case again: your balance or your token’s value grows by itself, and our guide to interest-bearing tokens covers rebasing and reward tokens.
Variable rates: today’s figure is a snapshot
Most lending yields move with demand. When borrowers use more of a pool, the rate rises; when they repay, it falls. An APY therefore answers “what would a year look like if this second lasted a year”. It does not forecast. On 31 October 2026, Aave’s USDT market on Ethereum showed 6.01% on DefiLlama, up 2.64 points in seven days, against a 30-day average of 3.81%.
Auto-compounding is not automatic
Interest compounds only if someone adds it to the balance. Sometimes the protocol does it by design. Sometimes a vault harvests rewards and redeposits them, and pays for that from the yield. Often nobody does it, and the APY on the page describes a schedule you would have to run yourself, paying a transaction every time. That version 2 guide lists liquidity-mining rewards as a non-compounding APR, and Aave’s library works them out the same way, so adding a reward APR to a supply APY mixes two kinds of number. DefiLlama’s totals are plain sums of this sort: on the line in the next section showing 7.21%, that is 5.43% plus 1.78%.
A short example with a labelled assumption shows why this matters. Suppose 20% APR and 15 dollars of gas per compounding, ignoring the small effect of gas on the balance.
| Yearly profit (example) | Once a year | Monthly | Weekly | Daily |
|---|---|---|---|---|
| Deposit of 1,000 dollars | 185 | 39 | -559 | -5,254 |
| Deposit of 100,000 dollars | 19,985 | 21,759 | 21,313 | 16,659 |
At 1,000 dollars the best schedule in this example is almost no compounding, and daily compounding would burn more gas than the deposit itself, so the APY in the earlier table is out of reach. At 100,000 dollars, monthly wins, and daily gives up about 5,100 dollars against it. The right frequency depends on your balance and the day’s gas.
Reading a yield page, line by line
DefiLlama Yields is a convenient training ground because it splits each line into parts. Its API, as read on 31 October 2026, returns a total (apy), a part from the activity itself (apyBase), a part from token rewards (apyReward) and a 30-day average (apyMean30d). The dates and pools below come from that feed, and they are examples for reading practice, not a selection.
| Pool, retrieved 31 Oct 2026, about 09:30 UTC | TVL | Total APY | Base | Reward | 30-day mean |
|---|---|---|---|---|---|
| Aave v3 Ethereum, USDC | $92.7M | 5.43% | 5.43% | none | 4.40% |
| Aave v3 Ethereum, USDC (Umbrella) | $54.6M | 7.21% | 5.43% | 1.78% | 5.98% |
| Aave v3 Ethereum, USDT | $112.3M | 6.01% | 6.01% | none | 3.81% |
| Morpho Base, GROVE-STEAKUSDC | $554.4M | 7.47% | 7.47% | 0 | 4.98% |
| Morpho Base, SIRLOINUSDC | $443.8M | 7.97% | 5.60% | 2.37% | 5.96% |
| Nest CL, Hyperliquid L1, WHYPE-USDC | $12.1M | 61.15% | none | 61.15% | 56.04% |
Work through a line in this order.
- Split base and reward. The base comes from what the pool does. The reward depends on a token budget that someone can cut, and the WHYPE-USDC line above consists of it entirely.
- Find out which token pays. A reward in the asset you deposited is different from a reward in a token that can fall 70% in a year. On Aave’s Umbrella USDC line, for instance, the reward token DefiLlama lists is aEthUSDC, Aave’s own USDC stablecoin, which is a claim on its issuer.">deposit token.
- Compare now with the 30-day mean. On the Morpho GROVE line, 7.47% today sat against 4.98% over 30 days. The second figure tells you more about what a month has really looked like. A 7-day average, where a page shows one, sits between the two: smoother than today, quicker than a month to show a change.
- Check the size. Total value locked tells you how much money shares the yield and how far your own deposit would move it. A large TVL is not a safety certificate.
- Check what the extra is paying for. The two USDC lines on Aave have the same 5.43% base. The Umbrella line adds 1.78% because it is a different position: the deposit is staked in Aave’s Umbrella system, which covers bad debt. Past a set threshold, stakers of that asset can be slashed, in extreme cases up to their full stake, and leaving takes a 20-day cooldown during which the money stays exposed.
- Read the terms around the number: the chain, any lockup or withdrawal delay, any deposit or performance fee, and the kind of position (lending, vault or liquidity pool).
From headline yield to net return: a worked example
All figures in this section are invented for teaching, except the gas reading of 31 October, and they use simplified assumptions stated as they arrive.
Gas depends on the day and on your deposit
At about 09:57 UTC on 31 October 2026, a public Ethereum node reported a gas price of about 0.041 gwei, with ether near 2,243 dollars on DefiLlama’s price feed. A 200,000-gas transaction, a rough size we assume for a supply, cost about 2 cents. That reading can change quickly: gas fees rise when the network is busy, and they differ from chain to chain.
Suppose gas costs 15 dollars each way. On 500 dollars at 8% APY, the year pays 40 dollars and gas takes 30, so you net 10 dollars, or 2%. On 5,000 dollars, the same trip nets 370, or 7.4%. The rate on the page was identical in both cases.
Impermanent loss in a liquidity pool
A reminder from our lesson on liquidity pools and impermanent loss: in a standard 50/50 pool, the position ends up worth less than simply holding the two assets when their relative price moves. For a price ratio change r, the loss is 2 x sqrt(r) / (1 + r) – 1. That gives -5.72% if one asset doubles or halves against the other, and -20% if it moves four times. Our guide to providing liquidity covers the practical side.
Rewards paid in a token that falls
A reward APR is usually quoted at today’s token price. If the token loses 70% of its value, a 30% reward APR pays 9%, valued at the end of the year. This is a simplification: rewards arrive over the months, and selling them along the way would have kept more of their value.
Putting it together
Example: 1,000 dollars in a pool, half a volatile token and half USDC, showing 70% in total: 40% fee APR plus 30% reward APR. Over the year the volatile token halves against USDC, the reward token falls 70%, and three transactions cost 15 dollars each. Fees are simplified to a flat 40% of the starting deposit.
| Line (example) | Dollars | Running total |
|---|---|---|
| Starting deposit | 1,000 | |
| Headline: 70% paid in full | +700 | 1,700 |
| Reward token falls 70% | -210 | 1,490 |
| Position loses value: price halves, including impermanent loss | -293 | 1,197 |
| Gas: three transactions at 15 dollars | -45 | 1,152 |
The 70% on the screen became 15.2% in dollars. There is a second reading. Had you simply held the two assets, you would have 750 dollars, so the pool did earn its keep against holding, by about 402 dollars. Of the 293-dollar fall, 250 comes from the token’s price and only 43 from wallet. It becomes permanent when the provider withdraws.">impermanent loss. Net against what? You have to pick the comparison before the number means anything: against dollars, against holding, or against a plain lending rate.
Taxes come after all of this and vary by country. Rewards can create a tax event of their own, as explained in our guide to crypto taxes in the United States, so the net figure above is still before tax.
Traps that turn a fair number into a misleading one
Annualising a single day
A pool pays 0.1% today. Multiply by 365 and you can print 36.5% APR. Compound it daily and you can print 44.03% APY. Both assume that one day repeats for a year, which almost never happens.
A live case appeared while this lesson was being written. On 31 October 2026, DefiLlama showed Lido’s stETH at 15.07%, with a 30-day mean of 2.55%. Lido’s own API carried the same jump: readings around 2.25% on most of the previous days, then 15.08% on its 30 October entry, for a seven-day average of 4.16%. We found no published explanation of that one reading on 31 October, and it is not a yield anyone should plan on. It shows why a single-day number should send you to the longer average and the protocol’s own page.
Swapped labels and “up to”
An APR shown next to a rival’s APY makes the rival look better for no real reason, at least on high rates: 100% APR and 171% APY can be the same rate. “Up to” usually refers to the longest lock or the largest boost, and most depositors will not get it.
Assumed compounding of rewards
Some pages compound a reward rate into an APY as though you claimed, sold and redeposited every day at no cost. If you cannot name who performs those steps and who pays for them, take the APR.
A rate that comes from a reserve
Anchor, on Terra, is the case to remember. Its deposit rate was set at around 20%, and an on-chain reserve paid the extra interest. According to the account of the collapse by Haseeb Qureshi, a managing partner at Dragonfly, the reserve drained as deposits grew, and in February 2022 Do Kwon had to recapitalise it with 450 million dollars of UST. Borrowers were never paying that 20% on their own; the reserve covered the rest.
Six checks before you deposit
- Write down whether the figure is an APR or an APY, and how often it compounds.
- Split it into base and reward, and name the token that pays the reward.
- Compare it with the 30-day average and, if you can, with the protocol’s own page.
- Estimate your costs in dollars at your deposit size: gas in, gas out, claims, and any vault fee.
- For a liquidity pool, run the numbers with one asset down 50%, and decide what you compare the result against.
- Ask who pays the yield, and what would make that payment stop.
The next lesson of the DeFi path turns to the tools that automate compounding, yield aggregators and vaults, with the arithmetic above as its starting point.
