TVL, APY, and Other Metrics Used by Yield Optimizers

Detailed Instructions

Begin by quantifying your investment thesis. Determine the total capital to allocate, your target time horizon (e.g., short-term liquidity provision vs. long-term staking), and your risk tolerance for impermanent loss, smart contract vulnerability, and protocol failure. Define acceptable levels of complexity, such as whether you will interact with multi-layered strategies or stick to single-asset vaults. This step creates a filter for all subsequent strategy evaluations.

• Sub-step 1: Allocate a specific capital amount (e.g., 5 ETH) and decide if it's for principal preservation or aggressive growth.
• Sub-step 2: List your risk priorities, ranking concerns like smart contract risk above market volatility.
• Sub-step 3: Specify your desired involvement level, deciding between passive deposits and active strategy monitoring.

Tip: Document these parameters. They are your objective criteria to prevent emotional decisions during high-APY opportunities.

Detailed Instructions

Investigate the primary yield source (e.g., a lending pool like Aave or a DEX like Uniswap V3) that the optimizer vault feeds from. Check for audit reports from reputable firms and review the audit history for severity and resolution of findings. Examine the strategy's smart contract logic: how does it automate deposits, harvest rewards, compound yields, and handle withdrawals? Look for any dependency on admin keys or complex fee structures.

• Sub-step 1: Verify protocol audits on sites like DefiLlama or the project's official documentation. Note the date and scope.
• Sub-step 2: Trace the vault's transaction flow. Use a block explorer to see interactions with the base protocol (e.g., calls to supply() or deposit()).
• Sub-step 3: Review the strategy's fee breakdown, including performance fees, withdrawal fees, and any deposit fees.

javascriptCopy
// Example: Checking a vault's strategy address on Etherscan
const strategyAddress = '0x...'; // The vault's strategy contract
// Review the 'Contract' tab for source code and 'Transactions' for recent activity.

Tip: A high APY built on unaudited or frequently exploited base protocols is a critical red flag.

Detailed Instructions

Scrutinize the Annual Percentage Yield (APY) composition. Distinguish between base yield (e.g., lending interest) and incentive yield (often volatile token emissions). Analyze Total Value Locked (TVL) trends over 30-90 days; a sharply declining TVL can signal user exit or strategy underperformance. Use dashboards like DefiLlama to compare the vault's performance against its underlying protocol and direct deposits. Check for APY volatility—a stable 8% is often preferable to a spiking 50% that quickly collapses.

• Sub-step 1: Decompose the APY. If it's 25%, determine what portion comes from stable rewards vs. inflationary tokens.
• Sub-step 2: Graph the vault's TVL history. Correlate TVL dips with market events or protocol announcements.
• Sub-step 3: Calculate the net APY after factoring in all stated fees (e.g., a 20% performance fee on yields).

Tip: Prioritize strategies that maintain performance through multiple market cycles, not just during bull markets.

Detailed Instructions

Understand the liquidity constraints and costs of exiting the position. For LP token vaults, assess the underlying pool's depth to estimate slippage upon withdrawal. Review the vault's own withdrawal process: is it instant, or does it involve a cooldown period or epoch-based system? Examine the worst-case scenario actions, such as emergency withdrawal functions and whether the strategy can be paused by governance. Calculate the total cost of a full exit, including network gas fees, protocol withdrawal fees, and expected slippage.

• Sub-step 1: Check the liquidity depth of the vault's output token on decentralized exchanges using a tool like Uniswap's interface.
• Sub-step 2: Read the vault's documentation for withdrawal delays and any lock-up periods for harvested rewards.
• Sub-step 3: Locate the emergency exit or panic function in the strategy contract and understand its triggers and access controls.

solidityCopy
// Example snippet checking for an emergency withdrawal function
function panic() external onlyAuthorized {
    // Logic to withdraw all funds from strategy to vault
    IStrategy(strategy).withdraw(_amount);
}

Tip: A strategy with high yields but poor liquidity is a liquidity trap; ensure you can exit without significant loss.

Detailed Instructions

After due diligence, execute your deposit. Use a block explorer to verify the transaction succeeded and that your funds are correctly represented as vault shares. Establish a monitoring regimen. Set up alerts for on-chain events related to the vault or underlying protocol, such as large withdrawals, fee changes, or governance proposals. Schedule periodic reviews (e.g., weekly or monthly) to reassess the strategy's APY, TVL health, and the security posture of the base protocol. Be prepared to rebalance based on changing market conditions or if the strategy's risk-reward profile deteriorates.

• Sub-step 1: After depositing, save the transaction hash and verify your balance in the vault contract via the explorer.
• Sub-step 2: Use a service like Tenderly or DeBank to create alerts for specific contract events from the vault.
• Sub-step 3: During reviews, compare your realized yield (actual profits) against the projected APY to gauge strategy efficiency.

Tip: Automated monitoring is crucial. Do not "set and forget" a yield position, as conditions can change rapidly.