Rebalancing

What is Rebalancing?

During Rebalancing, liquidity will be withdrawn from the old Liquidity Position, and re-deposited into a new position, so that an LP vault can continue to capture fees for depositors and increase Capital Efficiency for liquidity managers.

Alpha Vaults allows Rebalancing to take place with 1-click.

When rebalance is triggered, Alpha Vaults will chose a new range on behalf of the user, withdraw all the liquidity from the old range, and redeposit all the vault's holdings into the new range.

This means:

New deposits since the last rebalance will not deposited into the pool, nor will they start earning Fees Income, until another rebalance is triggered.

Rebalancing Conditions

Rebalancing happens on-chain, and cannot take place before the Rebalance Period, or if the price movement since the last rebalance is less than the Minimum Tick Movement.

By default, only the vault manager can trigger rebalancing. They can allow anyone to trigger rebalance once the Rebalancing Conditions are met.

Automating Rebalance

There are many ways to automate rebalance. The following discusses some methods and their pros and cons:

Method 1 - Use an automation provider

This method uses 3rd party providers (eg Gelato Automate) to call rebalance(). An example is provided in the walkthrough.

This is the easiest method to automate rebalance, as it is the least technical and requires no extra resources, apart from paying the rebalancing gas fees and 3rd party fees.

The disadvantage is that 3rd party reliance can increase security risks, increase the cost of rebalancing, require more frequent monitoring, and more difficult to become fully decentralized because the 3rd party may not be decentralized.

Method 2 - Incentivise the community to call rebalance()

Rebalancing is a way to increase liquidity as the price moves and as such, incentivising the community to rebalance is a simpler way to incentivise liquidity (compared to staking), because users do not need to deposit to receive the rewards.

To incentivise the community, projects can either build a reward contract to reward wallets calling the rebalance() method, or they can manually pay out rewards to eligible wallets.

The advantages of this method are:

• It allows liquid markets to be created using little funds, because projects can change the strategy parameters to concentrate more liquidity (eg by having narrow base and limit orders), set a low rebalancing period, and then incentivise the community to rebalance the vault.

• It achieves better decentralization, because rebalance() is called by the community.

The disadvantage is that:

• Requires a separate reward contract to be build, which introduces security risks and operational complexity.

• Incentives for LPs needs to be high to compensate for higher Capital Loss, due to narrower ranges and more frequently rebalancing.

• Rebalancing incentives are not always available because its availability depends on the rebalancing period.

This method may be suitable for smaller projects in bull markets, projects with a strong community interested in acquiring their tokens, or projects wishing to become fully decentralized.

Method 3 - Build keeper bots to call rebalance()

Keeper bots are scripts that automatically call rebalance() from a wallet address.

This method allows rebalancing to take place at different times, and is ideal for managers who have their own rebalancing strategy.

The disadvantage is the technical barrier required to set up and maintain keeper bots, and the know-how to determine the optimal rebalancing strategy.

This method may therefore be suitable for projects who have sufficient technical resources and knowledge. A typical example is market maker using Alpha Vault to support their own market making strategies.

Method 4 - Manually call rebalance()

This is whenrebalance() is called manually from a wallet, without using any of the solutions above. It can be done from Alpha Vaults web app, from a blockchain explorer (eg Etherscan), or using the vault's ABI.

Vault managers can use this as a fall-back method if the other methods fail.

Summary

The above describe some methods to trigger rebalance, and many more may emerge as Alpha Vaults's use cases increase. From Charm's experience to date, the exact method(s) depend on:

• The total amount of incentives offered to compensate IL.

• The amount of treasury funding used for rebalancing.

• The level of engagements projects wish to have with their community.

• The project’s technical resources.

• Whether projects want to actively manage liquidity themselves.

• The projects' plans for decentralization

• Whether projects want to incentivise liquidity using funds or token incentives.

• Who the depositers are (treasury vs public).