APY and APR.

Annual Percentage Yield (APR) and Annual Percentage Rate (APR) are formulas in which interest is calculated on how much will be earned from an investment for a given period. Both terms are used on the blockchain but have separate methods of calculation, the difference is (APY) “compounds interest” and (APR) does not because it’s a simple interest rate.

Annual Percentage Yield 

The annual percentage yield (APY) is the amount of return earned on an investment. The interest is compounded periodically, for example.

The rate of return is equal to the percentage of growth in an investment over a year, which is usually applied. This method is applied to blockchain decentralized finance projects.

An Example Of APY Yearly Interest Generated.

When $100 is deposited to earn 5% interest a year, and the deposit is compounded quarterly, at the end of the year you would have $105.095. 

The APY = (1 + .05/4) * 4 – 1 = .05095 = 5.095%.

For example, if the $100 is held for five years and compounded quarterly, the amount initially deposited would grow to $127.085. Excluding the compounded interest, it will be $125, and the $25 interest compounded an additional $2.085.

★ X = D(1 + r/n)n*y 

= $100(1 + .05/5)5*5

= $100(2.085)

= $127.085

For:

★ X = Final amount

★ D = Initial Deposit

★ r = period rate

★ n = number of compounding periods per year

★ y = number of years

Comparing APY to APR.

APY compiles the compounded interest rate earned in one year. APY does not include fees or costs of implementation, taking into account compound interest. APR Includes any fees or costs implemented during a transaction and does not take into account the compounding of interest within a year. 

The APR. 

(APR) is used in the centralized finance (CeFi) system to calculate interest when deposits are loaned or borrowed out. The formula for calculating APR in traditional finance is a year of interest-bearing, calculating only the simple interest without being compounded. 

There are two forms of APR used in the implementation of interest-bearing by Centralized finance or Fintech.

The Fixed APR. – is a fixed interest rate formula set for borrowers and lenders, of how much interest they are earning or paying within a certain period. Fixed APR interest may fluctuate over time.

The Flexible APR. – is an interest rate that fluctuates with the price index. Which is often implemented by centralized cryptocurrency exchanges. Cryptocurrencies are volatile assets whose value may drastically go up or down, which triggers the adjustment of APR on deposits or collateral by the service provider.

In Conclusion.

APY is the most used interest calculation, offered on blockchain applications or platforms. APR is mostly used by fintech projects and in centralized finance. Interest offered is the most attractive part of any financial service. Therefore, there are competitive interest rates across platforms.

It’s advised to consult a financial advisor before investing.