Risk Metrics Explained
Understanding risk metrics is essential for evaluating vaults. This reference explains each metric, how it’s calculated, and how to use it in your vault analysis.
Drawdown
Section titled “Drawdown”Drawdown measures the decline from a vault’s peak value to its current or trough value. It answers: “How much could I lose from the top?”
Drawdown = (Peak Value - Current Value) / Peak Value × 100%
Maximum Drawdown (Max DD)
Section titled “Maximum Drawdown (Max DD)”The largest peak-to-trough decline over a vault’s entire history. Max DD is the single best measure of worst-case loss.
| Max DD Range | Interpretation |
|---|---|
| 0-10% | Low risk — steady performance with limited downside |
| 10-25% | Moderate risk — normal for directional vaults |
| 25-50% | High risk — significant loss potential |
| 50%+ | Very high risk — extreme loss potential, possible strategy failure |
Drawdown Duration
Section titled “Drawdown Duration”How long the vault took to recover from its maximum drawdown. A vault that recovers quickly is preferable to one that remains underwater for months.
| Duration | Assessment |
|---|---|
| < 7 days | Fast recovery, resilient strategy |
| 7-30 days | Moderate recovery, within normal range |
| 30-90 days | Slow recovery, concerning |
| 90+ days | Very slow, may indicate structural issues |
Volatility
Section titled “Volatility”Volatility measures how much a vault’s returns vary over time. Higher volatility means larger price swings — both up and down.
σ = √( Σ(Ri - R̄)² / N )
Where σ is standard deviation, Ri are individual period returns, R̄ is the average return, and N is the number of periods.
Volatility Interpretation
Section titled “Volatility Interpretation”| Volatility | What it means |
|---|---|
| Low | Steady, predictable returns. Lower risk, lower potential upside. |
| Moderate | Normal trading range. Expect periodic swings. |
| High | Large daily/weekly swings. Higher potential returns, higher risk of loss. |
Compare a vault’s volatility to similar vaults. A vault with double the volatility of peers should deliver proportionally higher returns to justify the risk.
Win Rate
Section titled “Win Rate”The percentage of trading periods (days or weeks) where the vault generated a positive return.
Win Rate = Positive Periods / Total Periods × 100%
| Win Rate | Assessment |
|---|---|
| 60%+ | Strong consistency — profitable most periods |
| 45-60% | Moderate — normal for directional strategies |
| Below 45% | Low — strategy may be overly risky or poorly managed |
Win rate alone is misleading. A vault with 40% win rate but huge winners and small losers can outperform a vault with 60% win rate and small winners but large losers.
Risk-Adjusted Return Metrics
Section titled “Risk-Adjusted Return Metrics”Return per Unit of Risk
Section titled “Return per Unit of Risk”The most useful way to compare vaults is to ask: “How much return do I get for each unit of risk I take?”
Return per Risk = APY / Max Drawdown
| Ratio | Assessment |
|---|---|
| > 3 | Excellent — strong returns for the risk taken |
| 1.5 - 3 | Good — reasonable risk-adjusted performance |
| 0.5 - 1.5 | Moderate — returns barely compensate for risk |
| < 0.5 | Poor — not worth the risk |
Grade System as a Risk Proxy
Section titled “Grade System as a Risk Proxy”The LP and DP grade system incorporates multiple risk factors:
| Grade | Risk Assessment |
|---|---|
| A | Low risk — consistent performance across metrics |
| B | Moderate risk — good but not exceptional |
| C | Elevated risk — some metrics below threshold |
| D | High risk — multiple metrics underperforming |
| F | Very high risk — consistent underperformance |
A vault with A grade in both LP and DP is generally lower risk than a vault with mixed or low grades — even if the lower-grade vault shows higher APR.
Concentration Risk
Section titled “Concentration Risk”Single-Vault Concentration
Section titled “Single-Vault Concentration”If you deposit in only one vault, you bear that vault’s full risk. Diversifying across multiple vaults reduces the impact of any single vault’s drawdown.
Depositor Concentration
Section titled “Depositor Concentration”A vault where one or two depositors hold most of the TVL is risky. If a large depositor withdraws, it can destabilize the vault.
| Top Depositor Share | Risk Level |
|---|---|
| < 10% | Low — well distributed |
| 10-25% | Moderate — some concentration |
| 25-50% | High — one whale controls significant TVL |
| > 50% | Critical — vault depends on single depositor |
Fee Risk
Section titled “Fee Risk”High fees amplify losses. If a vault charges 30% performance fee, you lose 30% more on each down period — the fee is calculated on gross returns, so negative returns are magnified.
Summary: Key Metrics to Watch
Section titled “Summary: Key Metrics to Watch”| Metric | What it tells you | Target |
|---|---|---|
| Max Drawdown | Worst-case loss scenario | Under 25% |
| Drawdown Duration | Recovery speed | Under 30 days |
| Volatility | Return consistency | Moderate relative to peers |
| Win Rate | Period profitability | 45%+ |
| Return per Risk | Risk-adjusted value | 1.5+ |
| LP / DP Grade | Overall quality signal | B or higher |
| Depositor Concentration | Single-whale risk | Top depositor under 25% |
Related
Section titled “Related”- Performance Metrics — detailed LP and DP grade calculations
- Vault Evaluation Strategy — applying these metrics to vault selection
- Column Reference — metrics available in the vault grid