Best Practices

Describing some recommended best practices when using the vaults.

Automate Rebalance

The best way to use Alpha Vaults is to use one of the methods to automate rebalance.

The vault will then provide liquidity on its own without further actions from the liquidity manager.

Bootstrapping liquidity

Using Alpha Vaults, liquid markets can be created using less funds by:

  • Setting a narrower range for the base order.

  • Set a lower Rebalancing Period, so that rebalances can happen more frequently.

Creating liquid markets using less funds is a key feature of Alpha Vaults. But this comes at higher risks for depositors and projects. Depositors may incur high capital losses, and projects may experience poor price discovery if the tokens trade out of range.

To mitigate the above, projects may wish to consider:

  • Building a staking contract to compensate for depositors' much higher risk of capital loss.

  • Set a higher % of liquidity to full-range, so there will still be price discovery if tokens trade out of range.

  • Warn users they will have higher capital losses, which can be compensated by staking rewards.

Mitigating impermanent loss (IL)

IL (or Capital Loss) are often higher with a narrower range order, and with more frequent rebalancing. Projects can mitigate the risks of impermanent loss by:

  • Frequently estimate the tokens' future volatility, and widen the base and limit order if volatility increases.

  • Frequently monitor the Range Indicator. If both indicators are often red, consider widening the ranges as IL is likely to be high.

  • Increase the rebalancing period, in order to realise less IL. This will only work if tokens stay within range, therefore it is helpful to also increase the width of the base and limit orders.

  • Having more % liquidity in Full-Range.

  • Build an incentive scheme (eg staking, rebalance incentives) to compensate for IL.

Impermanent loss cannot be eliminated, and is often higher for smaller cap tokens. It is therefore helpful to warn depositors of this risk.

Other best practices

Incentive Schemes

Alpha Vaults allow incentive schemes to be built on Uniswap V3 just like Uniswap V2. To incentivise liquidity, they can build a standaridised Uniswap V2 staking contract for stakers, and/or a separate reward contract for calling the rebalance method. The nature of the incentive schemes depends on the following:

  1. The amount of liquidity concentration

Concentrating more liquidity with tighter base and limit orders will incur more impermanent losses, and more incentives are required to compensate for LP losses.

  1. Pathway to decentralization.

Alpha Vaults allows liquidity to be managed using a small set of fully customisable on-chain parameters. Projects wishing to decentralize can include the parameters in an on-chain governance framework, and build a contract to incentive token holders to vote on the parameters' values.

  1. The volatility

Highly volatile pairs usually have higher IL, and will normally required more incentives to compensate for LP losses.

Building a capped vault

Capped vaults have a maximum amount of deposits they can accept, and is useful in the following circumstances:

  • Test a vault's LP strategy, before raising the deposit cap.

  • Build a vault that only manages treasury liquidity.

  • Prevent further deposits into the vault.

Strictly speaking, a capped vault is a cap on the maximum amount of vault shares it can issue, and as such the dollar amount of the cap will vary after they have been set.

The vaults created by Alpha Pro are uncapped by default. In order to create a capped vault, please consult the guide below, as failure to do so may result in the vault reaching its capped too quickly, before the vault manager can apply the cap.

  • If users want to create a capped vault from the start with a maximum dollar value of X, they need to:

  1. Create the vault and Immediately deposit a small amount of liquidity into the vault from the vault page. Do NOT publicise the vault in case the desired cap gets filled up immediately.

  2. Note down the USD value of the deposit, and the amount of vault shares received.

  3. Change the Max Total Supply in Edit Vault until the USD value is the cap amount.

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