APR (Annual Percentage Rate)
The simple annual rate of return on an investment, not accounting for the effect of compounding. In DeFi, APR represents the annualized yield you would earn if rewards were not reinvested. APR is always lower than or equal to APY for the same investment because APY factors in compounding.
“A lending protocol advertising 8% APR means you earn 8% on your deposit over a year if you manually claim and don't reinvest rewards. The equivalent APY would be higher if compounded daily.”
APY (Annual Percentage Yield)
The real rate of return on an investment, taking into account the effect of compound interest. APY represents what you would earn over a year if rewards are automatically reinvested. APY is always higher than APR when compounding occurs more than once per year. Extremely high advertised APYs in DeFi often signal unsustainable tokenomic models or elevated risk.
Yield Farming
The practice of strategically deploying crypto assets across DeFi protocols to maximize returns through a combination of trading fees, token rewards, lending interest, and liquidity incentives. Yield farmers actively move capital between protocols to chase the highest yields, often compounding returns by reinvesting rewards. Higher yields typically come with higher risks, including impermanent loss, smart contract exploits, and token devaluation.
DeFi (Decentralized Finance)
An ecosystem of financial services built on blockchain networks that operate without traditional intermediaries like banks, brokerages, or insurance companies. DeFi uses smart contracts to provide lending, borrowing, trading, insurance, derivatives, and yield generation in a permissionless, transparent, and composable manner. Anyone with a wallet can participate.