Understanding APR in Crypto: How Interest Rates Work

When you invest or borrow in crypto, you’ll encounter APR (Annual Percentage Rate) constantly. This rate represents the interest you earn from staking, liquidity pools, yield farming, or crypto savings accounts—or the interest you pay if you take out a crypto loan. Unlike some financial products, APR provides a straightforward annual figure without factoring in compounding effects, making it easy to compare across different offerings.

What is Crypto APR and Where You’ll See It

APR in crypto is calculated on your principal amount and represents a simple annual interest rate. If you deposit your cryptocurrency into a yield farming protocol and it offers 20% APR, you can expect to earn 20% annually on your initial investment—minus any protocol fees or other adjustments. The rate is annualized, meaning even if you hold your crypto for only three months, the APR can be scaled proportionally to reflect your actual earning period. You’ll encounter APR across virtually every crypto product offering returns: liquidity pools, validator staking programs, lending platforms, and specialized crypto savings accounts.

APR vs APY: Why Compounding Matters

Here’s where things get more nuanced. While APR doesn’t account for compounding, APY (Annual Percentage Yield) does. This distinction matters significantly for long-term investors. If a protocol advertises 20% APY instead of APR, it means your returns compound periodically—your earnings generate their own earnings. Over time, this compounds into meaningfully higher returns than simple APR. If you’re comparing two crypto investment opportunities, always check whether they’re quoting APR or APY, as this determines your actual annual return.

Earning APR Across Different Crypto Products

When you lend your crypto or stake it in a protocol, the APR tells you precisely how much interest you’ll earn annually on the amount you’ve committed. Conversely, if you borrow crypto, the APR indicates your annual interest cost on the borrowed sum. Some products offer variable APR that adjusts based on market demand, while others lock in fixed rates. Understanding whether you’re dealing with APR helps you calculate real returns and make informed decisions about where to deploy your capital in the decentralized finance landscape.