In crypto, two key terms define your passive earnings, often available via staking: APR (Annual Percentage Rate) and APY (Annual Percentage Yield).
Both measure interest, but there’s a key difference – APR doesn’t include compounding, while APY does. That means APY gives a clearer picture of actual returns when interest is reinvested.
You’ll see these terms when staking tokens, providing liquidity, or using yield farming.
If managing crypto wallets feels complex, centralized exchanges offer a simpler way to earn, though with trade-offs.
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The formula for APY and APR
APR is straightforward:
- APR = Initial Investment / Interest Earned in a Year * 100
APY, however, includes compounding:
APY = [1 + (r ÷ n)] ^ n – 1
- r = interest rate per period
- n = number of compounding periods in a year
Example: With $1,000 in USDT
Let’s say you stake $1,000 in USDT at 10% APR with monthly compounding.
- APR: You’d earn $100 after a year (10% of $1,000).
- APY: With monthly compounding (n = 12), the formula looks like this: APY =[ (1+ 0.10) ^ 12] −1 = 10.47%
That means instead of $100 with APR, you’d earn about $104.70 with APY – because of compounding.
Where is the yield coming from?
Crypto platforms offer APY through various sources:
- Staking: You lock up tokens to help secure a blockchain, and in return, you earn rewards.
- Liquidity Pools: You provide funds for decentralized exchanges (DEXs) to facilitate trades and earn fees. It is often referred to as yield farming.
- Lending: You lend cryptocurrencies to borrowers and collect interest. See the top crypto lending platforms.
Each source has its risks, but the key is that your earnings come from other users’ activities—trading, borrowing, or staking rewards.
Key differences between APR and APY in crypto
While compounding is the biggest difference, APR and APY also vary in how they are presented and affect your earnings.
- APY typically results in higher returns because it accounts for compound interest, whereas APR shows only the base rate.
- APY’s higher returns may attract users, but APR provides a clearer, fixed-rate expectation.
- APR is common for lending and borrowing, where interest is fixed. APY is often used for staking and DeFi, where reinvestment happens automatically.
- DeFi platforms highlight APY, while lending protocols and centralized exchanges often show APR.
Now that you know the key differences between APR and APY, the next question is whether these interest rates apply to all cryptocurrencies.
Can you earn APY/APR on all cryptocurrencies?
Not all cryptocurrencies generate yield. The ones that do typically fall into these categories are:
- Proof-of-Stake (PoS) Coins: Tokens like Ethereum (ETH) and Solana (SOL) allow staking.
- Stablecoins: USDT, USDC, and DAI can be used in lending platforms or liquidity pools.
- Governance Tokens: Some DeFi tokens (like AAVE or COMP) offer rewards for participation.
Bitcoin (BTC), for example, doesn’t generate native yield. However, some centralized exchanges offer BTC APY through lending programs.
Compound interest on your crypto using yield aggregators
Manually reinvesting earnings takes time. Yield aggregators automate this process by moving your funds between different platforms to maximize returns.
Below are 2 popular decentralized apps (dApps).
Beefy Finance: A Decentralized, Multichain Yield Optimizer
Beefy Finance helps users maximize returns by automatically reinvesting rewards. Instead of manually restaking earnings, Beefy’s Vaults do it for you.
- Supports multiple blockchains like Binance Smart Chain, Ethereum, and Polygon.
- Uses smart contracts to optimize yield strategies.
- Shows both APR (without compounding) and APY (with compounding) for each Vault.
Yearn Finance: Yield Aggregator for Passive Income
Yearn Finance works similarly but focuses on lending protocols like Aave and Compound.
- Moves funds between platforms to secure the best interest rates.
- Uses automated Vaults to maximize yield.
- APY is higher than APR because it compounds earnings.
When deciding which cryptocurrency to earn a yield, always check its total value locked (TVL).
Yield aggregators make DeFi easier but come with risks, like smart contract vulnerabilities and strategy changes.
If you prefer earning APY on your digital currencies from your wallet, see Exodus’s offerings. For US customers, crypto can be purchased via Venmo on Exodus, making it a highly popular option.
Risks of using decentralized DeFi protocols
While yield aggregators can maximize returns, they come with risks:
- Code vulnerabilities can be exploited, leading to fund losses with no recovery.
- Price fluctuations in liquidity pools can reduce the value of your holdings, which is known as impermanent loss.
- DeFi platforms are frequent targets for cyberattacks, draining user funds.
- Changing laws may impact access to DeFi services or earnings.
- Rug pulls – Some projects disappear overnight, leaving investors with worthless tokens.
Always research a platform’s security history and understand the risks before investing.
APY in centralized exchanges
If managing crypto wallets or interacting with DeFi platforms feels overwhelming, centralized exchanges (CEXs) offer a simpler alternative. Many exchanges let you earn interest on Bitcoin and other assets through savings programs.
MEXC: BTC APY Options
MEXC offers two types of savings:
- Flexible Savings: Up to 1.80% APY (varies by balance tier).
- Locked Savings (1 day): 0.38% APR, with daily interest distribution.
Flexible savings let you withdraw anytime, while locked savings require holding funds for a set period. Interest begins accumulating the day after you subscribe.
CEX.IO: BTC APY Options
CEX.IO provides a 0.5% annual reward for holding BTC in a savings account. Interest is distributed per 1,000 BTC held, at 0.42 BTC per thousand.
Compared to DeFi platforms, CEX APYs are lower, but they offer a more beginner-friendly experience.
Risks of using centralized exchanges for BTC APY
- You don’t control your private keys- the exchange holds funds.
- Some exchanges limit withdrawals during market stress.
- Users may lose access to funds if an exchange collapses.
Centralized exchanges offer convenience, but DeFi gives more control. Choosing between them depends on your risk tolerance and experience level.
Conclusion
APR and APY are essential concepts for earning passive income in crypto. APR represents simple interest, while APY accounts for compounding. Understanding the difference helps you compare returns across platforms.
DeFi offers higher yields but comes with risks like smart contract vulnerabilities. On the other hand, centralized exchanges provide a more beginner-friendly option at lower rates and with less control over funds.
Choosing between DeFi and CEXs depends on your risk tolerance and experience. Whether you prioritize security or higher returns, knowing where yields come from helps you make smarter financial decisions in crypto.
