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:

• 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.