APR Meaning

The annual percentage rate (APR) is a metric that expresses the yearly cost or return of a financial product as a percentage of the principal. In lending, APR reflects how much a borrower pays over a year, including interest and certain fees, relative to the amount borrowed. In investing or DeFi, APR is used to quote how much interest a lender or liquidity provider earns over a year on their deposited capital, excluding the effects of compounding.

In crypto markets, APR is commonly used for:

• Lending and borrowing on decentralized protocols, where the APR for borrowers and lenders adjusts dynamically based on supply and demand
• Staking and yield programs, where exchanges or protocols advertise a fixed or variable APR to attract deposits
• Margin and leveraged products, where the cost of borrowing funds is quoted as an annualized rate

Conceptually, APR can be approximated as: APR ≈ (Total interest and eligible fees over a year / Principal) × 100%

When funds are locked or deployed for less than a full year, the effective interest is prorated based on the time period. For example, depositing 1 ETH at a 20% APR for exactly 6 months would yield roughly 0.10 ETH in interest, assuming the rate remains constant and there is no compounding. A key distinction is between APR and APY (annual percentage yield).

APR ignores compounding, while APY incorporates how often interest is reinvested. If interest is paid out and automatically added back to the principal-daily, weekly, or monthly-the actual return can be higher than the quoted APR. This is why APR is often used to emphasize the cost of borrowing, while APY is used to highlight the full benefit of reinvested returns.

For investors and borrowers in DeFi, understanding APR helps compare opportunities and costs across platforms. However, many on-chain rates are variable and influenced by market conditions, so the realized annual return can differ from the initially quoted APR if utilization, incentives, or market parameters change over time.