Decentralized finance protocols offer yield opportunities through lending, liquidity provision, and Staking. Returns are typically quoted as APR (Annual Percentage Rate) or APY (Annual Percentage Yield). The critical difference is that APY accounts for the effect of compound interest, while APR does not.

The conversion from APR to APY depends on the compounding frequency. The formula is: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. Daily compounding produces the highest APY for a given APR, which is why many DeFi protocols auto-compound daily to maximize returns.

For example, if you deposit $10,000 at a daily rate of 0.05% compounded daily, your APR would be 18.25% and your APY would be approximately 20.02% due to compound interest. After 365 days, your balance would grow to approximately $12,002, earning about $2,002 in total yield. Higher daily rates or more frequent compounding amplify this effect significantly over time.