Strategies allocation scoring explained

What is strategy allocation scoring?

When creating a new vault or upgrading an existing vault, the Locus team uses an evaluation method we call Strategies allocation scoring. The methods described are widely used to select new strategies in the vault, to detect increasing risks, or to balance the profit/risk ratio.

The due diligence process for strategies within a vault involves token and protocol assessment - this step evaluates the tokens and protocols used in each strategy based on their security and sustainability. It also assesses the viability of the selected asset's business models.

Strategies are scored relative to each other, which helps determine the allocations of particular strategies within the vault.

1. Liquid treasury / TVL ratio

The Liquid Treasury-to-Total Value Locked ratio is a metric used to determine if a project’s treasury will be able to compensate the users in case of a shortfall event. In this context, “liquid” refers to assets that are unaffected by a certain protocol’s exploit, e.g. blue-chips, stablecoins, and any other tokens excluding the ones emitted by the said protocol.

The more assets in the protocol's treasury relative to the protocol's TVL, the higher the score.

ScoreLiquid treasury / TVL ratio

0

<25%

1

25-50%

2

50-75%

3

>75

P/F ratio is a metric showing the relationship between a token’s market capitalization and the fees generated by the protocol. In general, the higher the market cap of the token relative to gathered fees, the more overvalued an asset is likely to be.

ScoreP/F ratio

0

>10x

1

6-10x

2

3-6x

3

<3x

3. Circulating supply

The higher the circulating supply of an asset is, the less sell pressure there is to be expected, implying there is a lower chance of long-term price depreciation.

ScoreCirculating supply

0

<25%

1

25-50%

2

50-75%

3

>75

4. Unresolved vulnerabilities

The Locus team carefully investigates the contents of publicly available audits of the protocols and scores them according to the amount and severity of unresolved vulnerabilities.

ScoreUnresolved vulnerabilities

0

High-risk unresolved vulnerability found and not yet been adressed.

1

Multiple medium-to-high unresolved vulnerabilities or centralized control over key protocol/pool parameters

2

Multiple unresolved low-risk vulnerabilities

3

No unresolved vulnerabilities or multiple unresolved low-risk vulnerabilities with a sufficient explanation from the team

5. Yield source

This metric aimed to determine whether the returns in a particular protocol are sustainable or not. Protocols with sustainable returns are preferred, as they tend to have more longevity and require less maintenance. Yield sources are considered sustainable if the majority of income is generated by "real yield". Real yield is a crypto yield model designed to show that decentralised finance (DeFi) is sustainable, healthy and safe. Instead of incentives, investors earn on the income their funds actually generate, whether that's on-chain borrowing, lending protocols or liquidity provision.

ScoreYield source

0

>50% of the yield comes from token emissions

3

>50% of the yield comes from fees/revenue

6. Protocol TVL

The overall TVL of the platform is also considered in the score favouring the most well-known projects.

ScoreProtocol TVL

0

<$50M

1

$50-100M

2

$100-500M

3

$500M

7. Pool TVL

Besides the overall TVL of the protocol, the individual liquidity pool is also scored so that pools with larger TVL are considered preferable.

ScorePool TVL

0

<$10M

1

$10-50M

2

$50-100M

3

>$100M

8. Time elapsed since the last hack

Hacks in defi happen more often than we all would like unfortunately, however, the Locus team selects strategies and protocols that have not been hacked for a longer period. The longer the protocol has been operating without a shortfall, the less likely it is to get exploited in the future.

ScoreLindy effect

0

Up to 3 months post-hack

1

3-6 month post-hack

2

6-12 months post-hack

3

12+ months without hacks

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