DeFi Performance Metrics

Assessing DeFi investments performance: P&L, ROI, IL

P&L: profit & loss

The overall P&L of a DeFi investment represents the value of the investment today, compared to its initial value. The P&L reflects both the performance of the investment itself and the performance of the assets which are part of the investment.

More precisely, P&L is the difference between the current reserves (Capital, Yield, Tx Fees) at current USD rate and the initial capital invested at initial USD rate.

$$PNL = CurrentReserves@ currentUSDrate - InitialCapital@ initialUSDrate$$

$$CurrentReserves = CurrentCapital@currentUSDrate+Yield+Rewards-TXfees$$

For the case of Liquidity Pools (AMM pools) deposit investments, subject Impermanent Loss due to automatic rebalancing of the pair in case of price fluctuations, the initial capital invested (token X and token Y initial balances) might be different then the current capital (token X and Y current balances):

$$PNL=CurrencyDifference+Yield+Rewards-TXfees$$

$$CurrencyDifference=(Xc*Pxc+YcPyc)-(Xi*Pxi+Yi*Pyi)$$

Current	Initial
Xc - token X, current balance	Xi - token X, initial balance
Yc - token X, current balance	Yi - token X, initial balance
Pxc - Current Price of token X	Pxi - Initial Price of token X
Pyc - Current Price of token Y	Pyi - Initial Price of token Y

P&L is similar to ROI but it includes one variable: the appreciation / depreciation of asset invested.

ROI: return on investment

The ROI is the value of the investment today, compared to the asset(s) being hold. The ROI reflects the performance of the investment only.

More precisely, ROI is the difference between the current reserves at current USD rate and the initial capital invested at current USD rate.

$$ROI = CurrentReserves@ currentUSDrate - InitialCapital@ currentUSDrate$$

$$CurrentReserves = CurrentCapital@currentUSDrate+Yield+Rewards-TXfees$$

ROI is similar to P&L, except that the initial capital invested is valuated at current USD rate.

ROI is similar to IL (Impermanent Loss), but including the Yield, Rewards and TX fees.

IL: impermanent loss

For Liquidity Pools (AMM pools) investments, IL is the current value of the capital compared to value the initial capital would represent if it were held in the user’s account, not being invested; based on the assets' current pricing, at the moment when IL is evaluated.

It is only considered for open / active positions, because when the position is closed, the loss becomes permanent, and is reflected in the P&L (CurrencyDifference).

IL occurs when there is price volatility of one of the token pairs supplied in the liquidity pool, leading to automatic rebalancing of the pair to ensure the AMM ratio (for example 1:1). If the combined value of this pair within the liquidity pool is less than it would have been had the investor just held the two tokens, then IL occurs.

$$ImpermanentLoss=(Xc*Pxc+YcPyc)-(Xi*Pxc+Yi*Pyc)$$

Current	Initial
Xc - token X, current balance	Xi - token X, initial balance
Yc - token X, current balance	Yi - token X, initial balance
Pxc - Current Price of token X	Pxi - Initial Price of token X
Pyc - Current Price of token Y	Pyi - Initial Price of token Y

IL value depends on how the assets are re-balanced in the pool.

When the Yield & Rewards are added and the TX fees deducted to the IL, we obtain the ROI.