How APRs are calculated
APR and APY aren't the same number, and mixing them up flatters the wrong opportunity. Here's the difference, and what the headline rate hides.
APR — Annual Percentage Rate — expresses a rate on an annualized basis. It's essential to distinguish two related concepts.
APR vs. APY
- APR is the simple annualized rate, without compounding. If a pool pays 0.02% per day, the APR is roughly
0.02% × 365 ≈ 7.3%. It measures the raw rate before any reinvestment of earnings. - APY — Annual Percentage Yield — includes compounding: reinvesting earnings so you earn returns on returns. The more frequent the compounding, the more APY exceeds APR for the same base rate. Since many DeFi protocols accrue interest very frequently (per block), APY can be noticeably higher than APR.
What drives the rate
In lending protocols, the base rate is typically variable and driven by utilization (as covered in the health-factor and lending lessons), so the APR you see is a snapshot that changes as supply and demand shift.
On top of the base rate, some protocols add incentives or reward tokens — extra token emissions — and the displayed APR often combines base yield plus incentives. This is a caveat: incentive-driven APRs can be temporary and depend on the reward token's price, which may fall.
What to check when comparing
- Is the number APR or APY? They're not directly comparable.
- Is it variable or fixed?
- How much comes from base rate vs. incentives?
- Any fees or lock-up conditions that reduce the effective return?
Why it matters. The yield number is the most gamed figure in DeFi. A high APY can be honest compounding, or it can be a temporary emission of a token about to lose value — and the two look identical until you ask where the number comes from. Reading past the headline rate is the difference between a real return and a well-decorated one.
Educational information, not investment advice. Rates shown are variable and not guaranteed.