TL;DR
APR (Annual Percentage Rate) is the simple annual return without compounding, while APY (Annual Percentage Yield) includes the effect of compounding, making it higher than APR for the same underlying rate.
If a pool pays 1% per month: APR = 12% (1% × 12 months). APY = 12.68% (because each month’s returns earn returns the next month). The more frequently rewards compound, the larger the gap between APR and APY. At 100% APR with daily compounding, APY is actually 171.5%. DeFi protocols sometimes display whichever number looks higher to attract depositors.
Use APR when rewards don’t auto-compound (most LP farming — you must manually harvest and restake). Use APY when rewards auto-compound (vaults like Kamino or auto-compounding strategies). When comparing two opportunities, make sure you’re comparing the same metric. A 50% APR that you manually compound weekly might outperform a 45% APY, depending on gas costs and frequency.
A 10,000% APY looks incredible but is almost always unsustainable. These rates typically come from high token emissions that dilute the reward token’s value. If a farm pays 10,000% APY in its governance token and that token drops 95%, your real return is negative. Focus on where the yield comes from: trading fees (organic), lending interest (organic), or token emissions (inflationary, likely to decrease).