Crypto APR and APY: calculate yield before comparing offers
A yield percentage is a calculation with assumptions. Compounding, changing rates, reward tokens, fees and withdrawal conditions determine how far it is from the return you eventually receive.
Your task: turn a displayed yield into a transparent estimate for your amount and holding period, then identify what could invalidate it.
Keep the rate, balance and value separate
APR: a rate before compounding
Crypto platforms often use APR for an annualized simple reward rate. For a fixed rate r and a year fraction t, the illustrative reward is principal × r × t. Check the provider’s definition, included fees and whether the rate is fixed or variable.
APY: compounding assumptions included
For a fixed nominal annual rate r compounded n times per year, APY = (1 + r/n)^n − 1. This assumes rewards can be reinvested on that schedule at the same rate. An APY is annualized; it is not the return for every holding period.
Value: units are not purchasing power
More tokens can still be worth less money if their price falls. Separate rewards in the deposited asset from incentives in another token. Account for conversion costs, token inflation, depegging and the risk of losing principal.
Build a yield comparison you can explain
Identify who pays the reward
Distinguish lending interest, staking rewards, trading fees and temporary token incentives. Read the product’s mechanics. For example, lending supply rates can change with borrowing demand; a displayed rate is not a promise for the coming year.
Match the time and reinvestment assumptions
Record the amount, holding period, rate, compounding schedule and reward currency. A “7-day APY” commonly annualizes a recent observation window; it does not mean that percentage is earned in seven days. Check the specific methodology and whether compounding is automatic or requires paid transactions.
Subtract costs and check the exit
Include entry, claim, reinvestment, conversion and withdrawal costs. Check lockups, queues and available liquidity. Staking penalties, contract failures, custody losses and liquidation when collateral is borrowed against are separate risks that an APY does not measure.
Worked example: 5% APR is not 0.512% APY
Assume 1,000 token units, a constant 5% nominal APR and cost-free daily compounding for 365 days. APY = (1 + 0.05/365)^365 − 1 ≈ 5.1267%, giving about 1,051.27 units. After only 30 days, the same assumptions give about 1,004.12 units, not 1,050. If entry and exit together cost 6 units, the 30-day net result is about 998.12 units. Token price changes and taxes are excluded. These are hypothetical calculations, not a product offer.
Mistakes that inflate the headline
Compounding an APY a second time
If the figure already represents effective annual yield, do not treat it as nominal APR and compound it again. Under a constant effective annual yield y, a simplified t-day estimate is principal × (1 + y)^(t/365). Actual accrual rules may differ.
Assuming a short promotional rate lasts
A high annualized rate over a brief window or a capped bonus may apply to only part of your balance or period. Compare base yield and incentives separately, and show what happens when the incentive ends.
Ignoring the currency of the result
A 10% increase in token units with a 20% token-price decline leaves 1.10 × 0.80 = 0.88 of the starting monetary value before costs. That is a 12% loss despite positive token yield.
Try it: estimate a short holding period
An illustrative product pays a fixed 12% simple APR without compounding. You supply 500 units for 30 days using a 365-day year. Total entry and exit costs are 3 units. What is the estimated net reward, and what does it not tell you?
Show the reasoning
Gross reward = 500 × 0.12 × 30/365 ≈ 4.93 units. After costs, the net reward is about 1.93 units. This says nothing about future token prices, changing rates, principal safety or whether you can withdraw when planned.
