Farm Scoring Algorithm
At the core of Sharpe Consensus lies a sophisticated farm scoring algorithm that evaluates yield-generating strategies based on multiple critical factors:
Normalized Yield Assessment: The algorithm calculates a normalized yield by analyzing the average returns across multiple time periods. This provides a baseline performance metric that accounts for both short-term fluctuations and long-term trends.
Volume-Weighted Performance: Farm scores incorporate volume weighting through logarithmic scaling, ensuring that strategies with substantial liquidity and transaction volume receive appropriate consideration while preventing excessive influence from outlier data points.
Risk-Adjusted Returns: Drawing inspiration from the Sortino ratio in traditional finance, the algorithm evaluates downside risk by specifically penalizing negative returns. This approach prioritizes consistent positive performance over volatile strategies that may occasionally deliver high returns but expose LPs to significant downside risk.
Consistency Factor: The algorithm applies a consistency factor that rewards strategies demonstrating stable returns over time. By analyzing variance across multiple periods, the scoring system favors farms that provide reliable, predictable performance—a critical consideration for risk-averse LPs.
The final farm score is calculated as:
This comprehensive scoring approach ensures that strategies are evaluated not just on raw returns, but on their risk-adjusted performance, consistency, and overall reliability.
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