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.

For example, if a strategy has a 10% APY, a $1,000 investment could earn $100 per year, assuming APY remains the same.

Why does APY change? APY is not fixed in DeFi and fluctuates based on:

β€’ Liquidity supply and demand – More deposits can lower APY, while higher borrowing demand can increase it.

β€’ Protocol incentives – Some strategies offer temporary rewards that may decrease over time.

β€’ Market conditions – A strong market may increase returns, while a downturn may reduce them

How to use this metric?

β€’ Higher APY can mean higher returns, but also higher risk.

β€’ Check historical APY trends to see if the rate is stable.

β€’ 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?

β€’ Higher TVL = More trust and stability – A well-funded strategy indicates strong user confidence.

β€’ Lower TVL = Higher risk – A strategy with low deposits may be new, untested, or less liquid.

How to use this metric?

β€’ Look for strategies with a healthy TVL (above $10 million is generally a good sign).

β€’ 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:

β€’ Market volatility – Are the assets stable (like USDC) or more speculative (like small altcoins)?

β€’ Protocol security – Has the protocol been audited and proven safe?

β€’ Liquidity risks – Can you exit the strategy easily?

Risk Levels:

How to use this metric?

β€’ For stable returns, focus on low-risk strategies.

β€’ For higher potential gains, medium-risk strategies offer a balance.

β€’ 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:

β€’ Instant Withdrawals – You can exit anytime without waiting.

β€’ Short-Term Lock-Up (3-7 Days) – You must wait a few days before withdrawing.

β€’ Long-Term Lock-Up (Weeks/Months) – Your funds are locked for a set period but may offer higher rewards.

How to use this metric?

β€’ If you need access to funds anytime, choose high-liquidity strategies.

β€’ If you are comfortable locking funds for higher returns, consider long-term strategies.

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