Learn how to interpret the key performance metrics used to evaluate vault performance and risk on Yield Delta.
What is the Sharpe Ratio?
The Sharpe Ratio is a measure of risk-adjusted return. It tells you how much excess return you receive for the extra volatility (risk) you endure by holding a risky asset instead of a risk-free asset.
Formula: Sharpe Ratio = (Return - Risk-free Rate) / Standard Deviation of Return
| Sharpe Ratio | Rating | Interpretation |
|---|---|---|
| < 0 | Poor | Returns are below the risk-free rate. You'd be better off with a risk-free investment. |
| 0 - 1 | Sub-optimal | Returns exceed risk-free rate, but the risk may not be adequately compensated. |
| 1 - 2 | Good | Acceptable risk-adjusted returns. The investment is reasonably efficient. |
| 2 - 3 | Very Good | Strong risk-adjusted performance. High returns relative to volatility. |
| > 3 | Excellent | Exceptional risk-adjusted returns. Rare and highly desirable performance. |
💡 Pro Tip: A higher Sharpe Ratio indicates better risk-adjusted performance. When comparing vaults, prefer those with higher Sharpe Ratios, as they offer more return per unit of risk taken.
Let's compare two vaults:
🔵 Vault A
🟢 Vault B
Analysis: While Vault B has a higher APY (35% vs 25%), Vault A has a better Sharpe Ratio (1.5 vs 1.0). This means Vault A provides better risk-adjusted returns - you get more return for each unit of risk you take. For risk-conscious investors, Vault A is the better choice.
What is APY?
APY (Annual Percentage Yield) represents the total return on your investment over one year, including compound interest. It accounts for how frequently returns are reinvested.
Example:
A vault with 12% APR compounded monthly:
APY = (1 + 0.12/12)^12 - 1 = 12.68%
The extra 0.68% comes from earning interest on your interest throughout the year.
What is TVL?
Total Value Locked (TVL) is the total amount of assets deposited in a vault or protocol, measured in USD. It's a key indicator of a vault's popularity and liquidity.
What is Volatility?
Volatility measures how much a vault's returns fluctuate over time. Higher volatility means more uncertainty and larger price swings.
| Volatility Level | Risk Profile | Suitable For |
|---|---|---|
| Low (< 10%) | Conservative | Risk-averse investors seeking stable returns |
| Medium (10-25%) | Moderate | Balanced portfolios with mixed risk tolerance |
| High (> 25%) | Aggressive | Risk-tolerant investors seeking maximum growth |
🛡️ Conservative Investor
⚖️ Balanced Investor
🚀 Aggressive Investor
When choosing between vaults, consider:
Historical Performance ≠ Future Results
Past Sharpe Ratios and APYs don't guarantee future performance. Market conditions change, and DeFi strategies can experience sudden shifts in returns and risk.
Smart Contract Risk
All DeFi vaults carry smart contract risk. Even high Sharpe Ratio vaults can experience total loss from exploits. Always DYOR and never invest more than you can afford to lose.
Impermanent Loss
Liquidity provision strategies can experience impermanent loss. Check the vault's IL protection mechanisms and historical IL statistics.
Understanding these metrics empowers you to make informed investment decisions. 📊