@m8752g

The Sharpe Ratio (excess return per unit of risk) for an AVS is (Reward APR - Risk-Free Rate) / σ, where σ is the standard deviation of returns. The primary source of volatility (σ) is the binary slashing risk. To exceed a baseline Sharpe Ratio (e.g., from traditional staking), the numerator must be large enough to offset this high volatility. The threshold multiplier is found by setting the AVS Sharpe Ratio equal to the baseline and solving for the reward. For example, if the baseline SR is 2, with a risk-free rate of 3% and volatility of 15%, the required excess return is 30%. This implies a total reward of 33%. This multiplier is extremely sensitive to the estimated volatility. A small increase in perceived slashing probability drastically increases σ, which in turn requires a much larger multiplier to maintain the same Sharpe Ratio, highlighting the high cost of compensating for volatile, binary outcomes.

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