What is APR?
In crypto interfaces, APR is mostly used for the annualized rate without including the compounding effect.
What does APR mean?
APR stands for Annual Percentage Rate; it represents the simple annual rate. It can be used for yield rates or borrowing costs in crypto applications. It does not account for compound interest—meaning the reinvesting of earnings to generate further returns—unlike APY.
However, products may present fees and calculation periods differently. Therefore, seeing an APR label is not enough to assume that all service fees are included. The description should state what the rate applies to and what additional costs are deducted separately.
Simple calculation example
Imagine a hypothetical 1,000 units of principal and a 12% annual APR. If the rate remains unchanged, there are no additional fees, and no compounding occurs, the one-year return is 120 units. In a simplified monthly calculation, this would be 10 units. Real-world applications may calculate the number of days and time intervals differently.
If the earned amount is reinvested every month, the calculation base for the following month grows. In this case, the effective annual yield could exceed 12%; APY is used to describe this compounding result. It is incorrect to compare APR and APY as if they were the same rate.
Why is it important when borrowing?
In a DeFi application, the borrowing APR can change based on pool utilization. A rate that appears as 5% today might increase tomorrow. Calculating the cost of a long-term debt using only the first day’s rate would be incomplete. Furthermore, if the collateral value drops, liquidation risk arises separately from the interest cost.
On the yield side, rewards might be paid in different tokens, or the campaign might be short-term. Displaying the rate annually does not mean the product will continue under the same conditions for a full year. Seeing the principal, duration, variable rate, and any additional fees in separate lines makes the calculation more understandable when reviewing.