Key Metrics to Evaluate a Strategy
Before investing in a DeFi strategy, it’s important to understand the key metrics that determine safety, profitability, and accessibility. Here’s a simple breakdown of what to look for when evaluating a strategy.
1. APY (Annual Percentage Yield) – What It Means & Why It Changes
APY represents the expected annual return on your investment, expressed as a percentage.
Why does APY change? APY is not fixed in DeFi and fluctuates based on:
• Liquidity supply and demand – More deposits can lower APY, while higher borrowing demand can increase it.
• Protocol incentives – Some strategies offer temporary rewards that may decrease over time.
• Market conditions – A strong market may increase returns, while a downturn may reduce them
How to use this metric?
• Higher APY can mean higher returns, but also higher risk.
• Check historical APY trends to see if the rate is stable.
• Be cautious of extremely high APYs that may not be sustainable.
2. TVL (Total Value Locked) – Why It Matters
TVL represents the total amount of capital deposited in a strategy or protocol. Why is TVL important?
• Higher TVL = More trust and stability – A well-funded strategy indicates strong user confidence.
• Lower TVL = Higher risk – A strategy with low deposits may be new, untested, or less liquid.
How to use this metric?
• Look for strategies with a healthy TVL (above $10 million is generally a good sign).
• Be cautious with strategies under $1 million TVL, as they may lack sufficient liquidity.
3. Risk Score – Low, Medium, or High?
The Risk Score helps determine how safe or risky a strategy is, based on factors like:
• Market volatility – Are the assets stable (like USDC) or more speculative (like small altcoins)?
• Protocol security – Has the protocol been audited and proven safe?
• Liquidity risks – Can you exit the strategy easily?
Risk Levels:
Low Risk – Stable returns, well-known protocols (e.g., USDC lending on Aave).
Medium Risk – Some price fluctuations and moderate risk exposure (e.g., ETH staking).
High Risk – High volatility, newer protocols, potential smart contract risks.
How to use this metric?
• For stable returns, focus on low-risk strategies.
• For higher potential gains, medium-risk strategies offer a balance.
• For aggressive growth, high-risk strategies may be suitable, but carry significant risks.
4. Liquidity & Withdrawals – Can You Exit Anytime?
Liquidity refers to how easily and quickly you can withdraw your money from a strategy.
Types of Liquidity in DeFi Strategies:
• Instant Withdrawals – You can exit anytime without waiting.
• Short-Term Lock-Up (3-7 Days) – You must wait a few days before withdrawing.
• Long-Term Lock-Up (Weeks/Months) – Your funds are locked for a set period but may offer higher rewards.
How to use this metric?
• If you need access to funds anytime, choose high-liquidity strategies.
• If you are comfortable locking funds for higher returns, consider long-term strategies.
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