By Femi Babatunde
Co-founder, Savecoins Technologies.
You’ve probably heard a lot about APRs & APYs, either because you are a finance enthusiast or you operate a savings account in any financial institution of your choice.
This article will properly explain what they mean, how they work, and what they apply to in Savecoins’ products & features.
What do they mean?
Annual Percentage Rate (APR)
The annual rate of return, abbreviated as APR, is a percentage-based yearly rate of return. This APR, often known as simple interest, provides DeFi users (Crypto) with a figure that they may compare to other protocols’ rates or in Traditional finance, -it means comparing the interest rate on fixed deposits of a bank with other banks.
How does APR work in Crypto?
In traditional finance (Banks), the interest generated as APR is done through Banks lending money to other customers, businesses and receiving interest on them.
In Crypto, Like TradFi, Protocols, Exchanges, and crypto platforms offer APRs on Savings or cryptocurrencies deposited with them. APRs in crypto platforms & DeFi protocols like Binance, Nexo, BlockFi, Compound etc. range from 0.5–25% per annum while in Traditional Finance (Banks) rates are usually within the range of 0.5–2%
APR in crypto is also derived by Staking Cryptocurrencies.
Annual Percentage Yield (APY)
To understand APY, we need to give a short explanation and introduction to ‘’Compound Interests”
Understanding What Compound Interests mean.
According to legend, -Einstein once referred to compound interest as humanity’s greatest invention. Whether you agree or disagree, it is critical to understand how compound interest applies to investments and loans.
Compounding, in its most basic form, refers to earning or paying interest on previous interest, which is added to the principal sum of a deposit or loan. A compound interest rate is used to calculate interest on the majority of loans and investments.
Annual Percentage Yield
The annual compounded return, denoted by the abbreviation APY, is expressed in percentages. It is calculated by calculating interest on both the initial amount invested and the interest accrued on this amount. In other words, interest on interest is earned.
Difference between APY & APR
The difference between the two (mostly) yearly returns is that APY accounts for compounding interest, whilst APR does not. Simply, APY stands for annual percentage yield. This means that acquired interest rates are factored into the next interest rate computation.
Let’s say you have $20,000 USDT and want to put it into DeFi. You have the option of choosing between two DeFi protocols that pay weekly interest.
Protocol A offers a ten percent annual percentage rate (APR) on USDT staked for a year.
Protocol B pays a ten percent annual percentage yield (APY) for staking USDT for a year.
After a year, how much do you earn?
Protocol A — You have a total of 22 000 USDT at the end of the year.
Protocol B — You have a total of 22 101.30 USDT at the end of the year.
Because the APY is determined on interest paid in past periods, Protocol B is a better investment. Interest will be paid on the amount deposited under procedure A.
How will APRs & APYs work on Savecoins?
Savecoins as a platform offers DCA access to Cryptocurrencies, stocks, and Crypto index funds. A core feature of Savecoins as a yield aggregator is to allow users to access APRs & APYs on deposits and staking from various trusted protocols, Crypto platforms, and exchanges that will be listed as options to choose from.