Understanding DeFi Yields: APY vs APR and Impermanent Loss Explained

Decentralized finance offers compelling yield opportunities, but navigating DeFi without understanding the mechanics leads to costly mistakes. This guide breaks down the essential concepts. APY vs APR: The Compounding Distinction APR represents simple interest. APY accounts for compounding. A 36.5% APR compounded daily produces approximately 44.1% APY — the 7.6% difference arises entirely from compounding. This distinction matters when comparing protocols. A platform advertising 40% APY is not necessarily better than one advertising 38% APR. Without converting both to the same basis, the comparison is meaningless. The conversion formula: APY = (1 + APR/n)^n - 1, where n is compounding periods per year. Financial analysis tools available through platforms like Pikestead provide automated APY/APR conversion alongside historical yield data. Impermanent Loss: The Hidden Cost Impermanent loss occurs when token prices in a liquidity pool diverge from entry. In a 50/50 AMM pool, the protocol