Overview: Risk score is a metric that helps investors assess the risk of an investment option more easily.
The score uses an average score of three inputs to determine the final scoring:
Input 1: Platform Risk
Feeder Finance aggregates products across multiple platforms and ultimately, the trust and risk of a platform typically are correlated with the platform TVL. While it may not be perfect at any given point, over time, TVL is able to provide a good indicator for how well managed and secure a platform is.
We separate the quantitative score into three ties:
Tier 1: Top tier platforms with over $500MM in TVL
Tier 2: Mid-tier platform with between $100MM and $500MM in TVL
Tier 3: Less than $100MM in TVL
Input 2: Product Risk
Each investment options typically end up one of many possible Layer 1 strategies. These strategies come with different risk profiles and we tier them as follow:
Tier 1: Swap Pool
Swap pools in our categorization refer to liquidity pools which are stablecoins. The risk of impermanent loss exists but is low. The strategy does not lock up capital or faces any withdrawal risk. We consider them relatively safe.
Tier 1: Platform Products
These are staking products that use a native token to be staked on its native platform. The platform risk is addressed, and staking contracts are typically standard, and given that their returns are mostly driven by emissions or redistribution of fees, the strategy itself is considered relatively safe.
Tier 2: Lending
While lending strategies are relatively safe due to borrowing being over collateralized, there are possible scenarios where withdrawals are not possible for a period of time if all funds lent are borrowed.
Tier 2: Next-Gen
At the moment, the only next-gen product is Feeder Finance's own vaults. Feeder Finance will likely aggregate other innovative products in the future and these will likely some form of aggregation within a single product. They're considered moderately safe.
Tier 3: Liquidity Pool
Liquidity pools are highly useful and widely used. Contracts on major DEX are safe and battle-tested.
However, the risk inherent in the liquidity pool is impermanent loss and the difficulty in predicting the out of it. There are factors that revolve around how not only one, but two tokens would perform over time AND against each other. We consider them to be a high-risk product.
Input 3: Token Risk
The risk profile of a token usually comes down to how liquid they are. Tokens of well-known or established projects can be considered risky if the liquidity is thin and large buys or sells can impact the price significantly. Inherent in the liquidity pool size is also how well-established and popular the project is; which implies riskiness. This may not be accurate in all scenarios as Tokenomics play a big role in driving this as well however we think it warrants an input in our Risk Score.
Tier 1: Over $100M in liquidity
Tier 2: Between $10MM and $100MM in liquidity
Tier 3: Less than $10MM in liquidity
We use data to drive three of these inputs into a score that averages out into the final score.
Let's take for example "CAKE AUTOv2 Staking" product: Autofarn has close to $1 billion in TVL (Tier 1 Platform); their strategy is to take CAKE and deposit CAKE into the Syrup Pool then auto-compounding CAKE (native token staked at its native platform = Tier 1 Product); and finally CAKE has a $400MM liquidity pool (Tier 1 Token). Averaging 1 three times gives us a Tier 1 ("Low") Risk Score for the product.
We'll continue to develop and update our scoring system over time to make sure it reflects the market and the available options on Feeder Finance platform. The latest status of the Risk Score can be found here.
Overview: Built on top of the Risk Score, the Return Score helps investors understand the level of return relative to a product's risk profile.
Each product is assigned a Risk Score explained in the prior section's process. Investment decisions traditionally are based on aligning risk and return with an investor's appetite.
Our Return Score aggregates all APY data from products of the same Risk Score and assigns a Return Score based on APY percentile.
High Return Score: Above 80th percentile
Medium Return Score: Between20th and 80th percentile
Low Return Score: Below 20th percentile
In other words, products of the same risk profile that are among the top 20% percent in terms of APY receive a 'High' Return Score, those at the bottom 20% receive a 'Low' Return Score, and everything in between a 'Medium' Return Score.
Note: We separated stablecoins from the risk profile dataset and calculated the score independently. This makes sense because stablecoins, unlike other tokens, could be said to be a risk class of their own and should be evaluated as such.
As Feeder Finance's product offerings increase, so will the sophistication and accuracy of Return Score relative to actual market conditions.