🔬 Kelly Criterion & Allocation
Zap Pilot uses the Kelly Criterion to optimize how we deploy capital within our Crypto and Stablecoin buckets.
While the Market Regime determines the split between Crypto and Stables (e.g., 60/40), the Kelly Criterion determines where that 60% Crypto or 40% Stables actually goes (e.g., Aave, Morpho, Uniswap).
🔍 1. What Is the Kelly Criterion?
The Kelly Criterion is a formula for maximizing long-term wealth growth by balancing expected return against risk.
📐 Basic Formula
allocation_weight = expected_return / variance
Protocols with higher yield and lower volatility get more capital.
⚙️ 2. Adapting for DeFi
We take the raw Kelly output and apply Real-World Risk Modifiers:
- TVL (Total Value Locked): We cap allocation to pools with low liquidity to avoid slippage.
- Protocol Age: Newer protocols get a "maturity penalty" to reduce smart contract risk.
- Audits: Unaudited protocols are excluded or strictly capped.
📊 3. Sample Allocation
If the Market Regime is Fear (60% Crypto / 40% Stables), the Kelly Engine might distribute the 40% Stablecoin portion like this:
- Morpho (USDC): 45% (High Safety, Moderate Yield)
- Aave v3 (USDT): 35% (High Safety, Moderate Yield)
- Hyperliquid (USDC): 20% (Higher Yield, Higher Risk)
This ensures diversification even within the asset classes.
✅ Summary
Zap Pilot combines Macro Sentiment (Fear & Greed) for the big picture with Kelly Optimization for the specific execution. This double-layer approach aims to protect capital while maximizing growth.