Updated on Fri, 7 Jun, 2024 at 4:02 PM

**TABLE OF CONTENTS**

**The APR (Annual Percentage Rate)**** **is a financial term that represents the annual interest rate applied to an investment, loan or line of credit. Unlike the APY (Annual Percentage Yield), the APR does not take into account the effect of compound interest and is calculated by simply multiplying the periodic interest rate by the number of periods in a year.

In the field of cryptoassets, the APR focuses mainly on the simple annual interest rate without taking into account compound interest.

It should be clarified that the RWA, per se, has no risks as such, since it is only a mathematical formula. However, there may be some risks related to the use of this RWA, mainly focused on the market in a generalist way. Some of them coincide with those of **APY****,** to which the following could be added:

since the APR does not consider compound interest, there may be a risk associated with re-using the rewards generated. If interest rates change, the return could be different from the initial APR interest rate.**Reinvestment risk:**When comparing different investment or loan opportunities, using APR instead of APY can lead to inaccurate comparisons, as the effect of compound interest on total return is not taken into account. This can make some investments or loans appear more attractive than they really are. It is therefore important to carefully consider whether the offer is an APY or APR offer.**Inaccurate comparison:**Although this risk may also be present in the case of APY, the RWA does not consider the effect of inflation on the real return of the investment. If the inflation rate is high, the real return obtained through the RWA may be lower than expected.**Inflation risk:**cryptoassets can experience significant fluctuations in value, which could affect the actual return obtained through the RWA.**Market volatility:**

The APR is calculated by multiplying the periodic interest rate by the number of periods in the year in which it has been applied. It does not indicate how many times the rate is actually applied to the balance.

APR = ((((Commissions+Interest) / Principal) / n) × 365 ) × 100

where:

Interest = Total interest paid over the life of the loan

Principal= Loan amount

n = Number of days of loan term

Financial instruments may have different ways of calculating this interest rate. For example, on a credit card, these values vary depending on the type of charge, the credit history of the individual and in some cases by the level or type of credit card. In

in addition, other factors such as cash advances, late payments or other card features can also affect the APR.

Bank loans, on the other hand, usually have a fixed or variable APR. A fixed APR loan has an interest rate that is guaranteed not to change during the life of the loan or credit. A variable APR loan, on the other hand, has an interest rate that can change at any time, depending on market conditions, regulations or any other element that the bank considers relevant to take into account.

In any case, the APR does not take into account the compounding of interest in a given year: it is based solely on the simple interest applied to the funds.

If we want to use an example focused **only in the crypto field**, we must take into account that the cryptoasset may not maintain the 1:1 parity with the euro, and therefore we must consider the possible fluctuations in the price of the cryptoasset. Despite charging a 10% APR on the crypto-asset denomination, the return translated into euros may be lower or higher depending on the value of the crypto-asset against the euro.

For example, in this example you want to make a deposit using cryptoassets on a DeFi platform. The platform offers deposits of a certain crypto-asset a 10% APR.

The assumption is based on if a deposit is made in a cryptoasset worth 1,000 units, and the interest is based on a 10% APR rate.

**Deposit amount:** 1,000 cryptoasset units

**APR:** 10%.

**Annual interest:** (1,000 pc) * (10%) = 100 pc crypto-assets

If the term of the deposit is 1 year, the total amount of interest at the end of the year will be 100 pc. Therefore, the amount of the deposit + Interest = 1,000 pc + 100 pc = 1,100 crypto-asset units.

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