APR - Annual Percentage Rate
APR comes into play when a cryptocurrency user decides to make their coins available for loans through staking and other DeFi methods. APR is the monetary value or reward that investors may earn, taking into consideration the interest rates and any other fees that borrowers must pay, exclusive of compounding interest.
For users who are venturing into DeFi and staking, terms like APR and APY will come up often. It is important to know the difference between the two, and know how each of them work when considering the rewards or value payment you will receive when putting your coins up into liquidity pools etc.
Essentially, APR is the yearly interest generated by a sum that's charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.
For borrowers in the crypto space, this rate determines how much interest they will be paying, and for lenders, this is the rate on which they will make returns. When it comes to determining your APR, the rates can fluctuate greatly, but they are always devoid of any compounding interest.
When you loan out your coins, say on an exchange that offers the service to gain liquidity in return for APR rewards, you can receive fixed or flexible lending.
Fixed lending is similar to what happens at a traditional bank. It secures your money for a defined length of time, usually seven to ninety days, at a fixed rate. The benefit of not touching your cryptocurrency is that it pays a greater rate of interest.
Flexible lending works in a similar way to a savings account. However, in this case, you have the option of withdrawing your cryptocurrency at any moment. The rates of return offered by this type of lending are lower.
When it comes to crypto lending and the interest you can earn from doing so it is important to remember the volatility in the space. This volatility can play a big role in the interest you earn.
For most people looking at lending their coins, they are doing so for an extended period of time and earn a passive income, but if the price of the primary asset, in this case a crypto, falls significantly, it can lead to a huge impact on revenue. Even those who go for fixed interest rates will still see fluctuating returns as the price moves up and down.
Additionally, having a fixed rate means having coins locked in for a period of time meaning there is no access or opportunity to withdraw the funds should anything negative happen in the market.