Risk is defined as the probability of total loss of collateral. For various yield strategies, we can separate most of the risks into:

1. Platform risks
2. Smart contract risks
3. Liquidity risks

If:

• $Y$ = Yield offered by the Defi Strategy.
• b = stETH base yield
• $R_{sc}$ = Smart contract risk premium (e.g. if (w)stETH is paired against other assets, this increases the risk premium)
• $R_{p}$ = Platform risk premium (e.g. liquidity providers on an obscure stableswap implementation would charge, say, 2% additional risk premium versus a 0.5% over an established stableswap protocol such as Curve or Balancer).
• $R_{l}$ = Liquidity risk premium (e.g. if (w)stETH is used as collateral for a defi strategy, low secondary market liquidity results in a higher risk premium charged for that defi strategy)

then, higher-than-base yields are worth the risks for users if and only if:

$$ Y - Y_b > \sum^n_{i=1}R_{sc} + \sum^n_{i=1}R_{p} + \sum^n_{i=1}R_{l} $$

where, $Y - Y_b$ is the risk-adjusted yield of the strategy.

On Platform Risks, governance, forks, media and decentralisation

Platforms are defined as the union of the ‘protocol’, frontend, governance, its team(s), community, its brand, culture and public perception.

Let’s consider two platforms: Aave and a fork of Aave. Aave has ‘quantifiable’ a platform risk $P$, and an Aave fork with a platform risk $Q$. Historically, aave forks have not been governed in a sensible manner, so $P << Q$.

This platform risk is somewhat quantifiable.

• On Aave, the lending rate for WBTC as of 14th November is 0.04%, with a reserve size of USD 3.55 billion.
• On Morpho, the earned yield for WBTC is 1.12%, with additional token incentives. The reserve size is USD 4.12 million.
• On UwUlend, the lending rate for WBTC is 3.23%, with an additional 11% of token incentives. The reserve size is USD 123k.