DEFI FUNDAMENTALS

What is the difference between CAGR, APR and APY?

Three numbers. Three different questions. Understanding the distinction between CAGR, APR, and APY will help you read yield dashboards accurately and compare DeFi strategies on equal footing.

Introduction

When browsing DeFi yield opportunities, you will quickly encounter three metrics that all claim to tell you how much you can earn: APR, APY, and sometimes CAGR. Protocols use them inconsistently, and without understanding what each one actually measures, it's easy to compare apples to oranges.

Each metric answers a different question:

• APR asks: "If today's daily return continued at the same rate linearly, what would the yearly rate be?"
• APY asks: "If today's daily return compounded every day for a full year, what would the total return be?"
• CAGR asks: "How fast did this investment actually grow, on average per year, over a historical period?"

APR and APY are forward-looking projections based on the current rate. CAGR is backward-looking — it measures what already happened.

APR — Annual Percentage Rate

APR is the simplest annualization. Take today's yield rate, multiply it by the number of periods in a year, and you have APR. No reinvestment is assumed — the interest earned does not itself earn more interest.

For example, if a lending protocol is paying 0.03% per day, the APR is simply 0.03% × 365 = 10.95% APR. It assumes you receive interest as a payment, not that you compound it.

In practice, pigi.finance uses a more precise two-step method: daily rates are first compounded across the observation window to produce a period return, which is then scaled linearly to an annual figure. For typical DeFi yields the difference is small (under 0.2pp at 10% APR), but it handles variable daily rates more accurately than the simplified formula above.

APR is most honest when you are not reinvesting your returns. If a protocol pays out rewards in a separate token that you manually sell each week, APR is the right number to look at.

Where you'll see it: Most DeFi lending protocols (Aave, Compound, Morpho) quote APR for both the supply and borrow sides. Liquidity pool dashboards often default to APR as well.

APY — Annual Percentage Yield

APY adds the effect of compounding. Each day's interest is added back to your principal, so tomorrow's interest is calculated on a slightly larger balance. Over a year, this snowball effect produces a higher effective return than APR alone would suggest.

Using the same 0.03% daily rate: APY = (1.0003)³⁶⁵ − 1 ≈ 11.57% APY. Compared to 10.95% APR, the difference is modest at low rates — but it grows significantly at higher yields. A protocol running at 0.15% per day shows 54.75% APR but 71.1% APY.

APY is the right metric when yield auto-compounds — for example, in ERC-4626 vaults where reinvestment happens automatically inside the contract, or in protocols where rewards are continuously added to your position without any action from you.

APY is always ≥ APR — the gap widens with higher rates and more frequent compounding. There is one exception: when the observation window is exactly one year, APY and APR are identical. Compounding once per year means (1 + annual_return)¹ − 1 = annual_return, the same result as the linear APR formula. The two metrics only diverge when the compounding period is shorter than a year (weekly, monthly, quarterly).

Where you'll see it: Yield aggregators (Yearn, Beefy, Convex) typically quote APY because they auto-compound your rewards. Many stablecoin vaults also advertise APY to reflect the true return a passive depositor actually receives.

CAGR — Compound Annual Growth Rate

CAGR is a historical metric. It takes a starting value, an ending value, and the time elapsed, then calculates the steady annual growth rate that would have produced the same result. Unlike APR and APY, it does not assume a fixed daily rate — it simply asks"what was the effective annual pace of growth?"

For example, if you deposited $10,000 into a vault and withdrew $13,600 two years later: CAGR = (13,600 / 10,000)^1/2 − 1 = 16.6% CAGR. The vault did not necessarily grow 16.6% each year — some months were better, some worse — but on average it compounded at that rate.

CAGR smooths out volatility. A fund that gained 50% in year one and lost 10% in year two has a CAGR of about 16.2% — even though no single year looked like that. This makes it useful for comparing strategies with uneven track records on a fair, annualized basis.

Where you'll see it: Strategy performance charts, fund fact sheets, and any comparison that spans multiple years of historical data. It is less common on yield dashboards that quote a current rate, but essential for backtesting and evaluating a fund's track record.

APR vs APY: the Compounding Effect

The only difference between APR and APY is whether returns are assumed to reinvest. This means:

• If a protocol auto-compounds (share price rises continuously), the number shown should be APY. If you're comparing it to a manually managed strategy, use APY on both sides.
• If you manually claim and re-deploy rewards, the actual APY you achieve depends on how often you compound. Compounding weekly gives a lower APY than daily.
• When a protocol quotes only APR and you auto-compound daily, you can convert: APY = (1 + APR/365)³⁶⁵ − 1.

At low rates (under ~5%), APR and APY are nearly identical. At 20% APR, APY is ~22.1%. At 100% APR, APY is ~171%. The gap becomes dramatic for high-yield DeFi strategies.

CAGR vs APY: Past vs Future

APY is a projection — it tells you what you would earn if the current rate held steady for a full year. CAGR tells you what you did earn, annualized over a historical period.

If a strategy maintained a consistent APY over its lifetime, the realized CAGR would equal that APY. In practice, rates fluctuate, so CAGR and APY will diverge. A vault that showed an impressive 40% APY during a bull market might have a 3-year CAGR of 18% once quieter periods are included.

This is why CAGR is the more honest metric for evaluating a strategy over time: it accounts for rate changes, downturns, and the actual reinvestment behavior of the vault, rather than extrapolating a single snapshot.

Which Number Should You Use?

The right metric depends on the question you're trying to answer:

On pigi.finance, we display both APR and APY for each vault so you can choose the frame that fits your decision.