Risk Assessment

Market Capitalization

The market capitalization of an asset is a key determinant of its risk profile. Higher capitalization generally corresponds to lower volatility and improved liquidity, enhancing overall stability. Conversely, if a vault’s market capitalization is relatively low, the liquidation risks exist and investors might find it difficult to redeem their assets face liquidation on certain occasions.

Codebase Complexity

The complexity of a codebase directly correlates with inherent risk levels. Simple strategies effectively mitigates implementation risks, which ensures smoother execution. Adopting a complex Algorithm indicates a higher risk of encountering challenges during test, running and maintenance, even though it might yield better profits.

Impermanent Losses

Assessing impermanent loss (IL) risk is crucial for evaluating the impact on assets deposited in the vault. IL is negligible when only a single asset is staked, and minimal when assets are tightly and positively correlated, such as with USDC-USDT or WBTC-BTC pairs. If the asset held in the vault is not a stablecoin, the asset may be assigned to a volatile pool, such as USDT-ETH, to earn LP incentives. The price difference between the two tokens can undergo significant fluctuations over a brief duration, thus exposing the vaulted asset to higher impermanent loss.

Third-party Audit

A third-party audit evaluates the integrity of a project's code segments, though it doesn't guarantee the discovery of all potential bugs and exploit vectors. However, undergoing an audit enhances code quality and mitigates security flaws, which bolster overall trustworthiness. It is always recommended that DYOR in addition to relying on the audit report.

Track Record

When evaluating investment assets, the duration of existence and the reputation of the underlying platform are significant considerations. A strong track record reflects the credibility and commitment of the team, which instills confidence in stakeholders, while a relatively weak record may raise doubts about the platform's reliability and long-term viability.