APY vs APR: What do they mean in crypto?

When newbies start trading cryptocurrencies or begin staking tokens on popular platforms like Sheesha Finance’s staking platform, they might get confused by all the jargon that comes with crypto, but in my opinion, it only takes a few minutes to demystify and explain things clearly.

So today, in this educational piece, we will look at the terms APY and APR and tell you the difference one little letter can make. Hopefully, by the end of this article, you’ll be able to tell the difference between the two and share it with others.

What is APY?

APY is a measure of the total return on an investment over a year, considering compound interest’s effect. But what is compound interest?

Well, compound interest allows investors to get interest on interest, adding their profit to the initial sum of the investment. So think about investing a small sum of money, making a profit on it, then reinvesting the initial amount plus the profit that you had already made so effectively you have now invested more than what you originally invested, and that’s what we call compounding. Easy isn’t it?

For instance, in the DeFi world, on staking platforms like Sheesha Finance, you can get the rewards for staking any of the Sheesha Tokens (ESHEESHA, BSHEESHA, or MSHEESHA) and add them to the overall staked tokens so that you receive higher profit next time. The APY is expressed as a percentage and reflects the annual return an investor would earn on their investment if the interest were compounded annually. For example, if you, as an investor, deposit $1000 into a savings account that offers an APY of 2%, you would earn $20 in interest over the course of a year.

As the original Smart Contracts for the 3 SHEESHA tokens were not created with an auto compounding function, to achieve the APY, the investor must manually restake daily for the entire year to achieve the desired APY.

What is APR?

APR, on the other hand, is a measure of the annual interest rate on a financial product. It is also expressed as a percentage, just like APY. In the crypto markets, APY is commonly used to describe the return on your investment for cryptocurrency staking or lending platforms. These platforms allow investors to earn a return on their cryptocurrency holdings by participating in the validation of transactions on a particular blockchain or by lending their cryptocurrencies to other users. The APY that these platforms, like the Sheesha Finance staking platform offer, reflects the annual return investors can expect to earn on their investment if they participate in staking or lending for an entire year.

The reason why APY is quoted more often than not in the crypto world compared to APR is that APR is simply not commonly used. This is because most cryptocurrency transactions do not involve borrowing money or paying interest. However, APR may be used to describe the annual cost of using certain cryptocurrency-based financial products, such as credit cards that allow users to borrow against their cryptocurrency holdings or loans that are secured by cryptocurrency collateral.

What’s the difference between APY and APR?

While both terms measure the annual return or cost of a financial product, they differ in a few key ways.

As you might have already understood, APY and APR are almost the same tool but bring different results. Both refer to the yearly investment interest, but APY provides higher yield profit due to compounding.

Currently, most DeFi tools and cryptocurrencies use APY as it is more well-recognized in the industry, and if you want to receive compound interest, you’ll have to do compounding manually to receive that quoted APY. Many users reinvest their profit daily or weekly to get higher profit this way.

What’s new for Sheesha?

At Sheesha Finance, we have worked on the automatic compounding mechanism for our much-awaited Consolidated Universe Token, which will be launched soon and will help traders and investors receive APY with no extra effort. Stay tuned for the good news!

Key takeaways:

1. APR means annual percentage rate, the investment rate you get with simple interest.

2. APY stands for annual percentage yield, which is based on the compound of your investment.

3. APY is more profitable than APR since it includes interest on interest and not only interest on the initial investment — so that means the investor must either continue to restake or opt-in for auto compounding.

4. In DeFi, APY is primarily possible due to manual compounding, when users add their interest to the initial investment every day in order to get more profit.

5. Sheesha Finance is currently working on the automatic compounding tool for its Universal Token, which will facilitate the trading process and make it much more beneficial for all our users.

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