Return on Collateral

Return on collateral is a performance metric that measures the profit generated by a specific asset used as collateral, relative to the total value of that collateral. In the world of decentralized finance, this includes not only trading profits but also any yield earned from staking or lending the collateral while it is locked.

Maximizing return on collateral is a primary goal for many professional traders and yield farmers. However, it often involves taking on additional risks, such as smart contract risk or impermanent loss.

To calculate this accurately, one must account for all costs, including borrowing fees and potential liquidation premiums. Evaluating this metric helps participants decide whether it is more profitable to deploy assets in a trading strategy or to utilize them in a yield-generating protocol.

It is a key driver of capital allocation decisions in the crypto economy.