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Rebalancing Triggers in Liquidity Provision Strategies

Introduction​

Rebalancing triggers are crucial components in automated liquidity provision strategies. They determine when a strategy should adjust its positions in response to market movements, ensuring optimal liquidity distribution and risk management. This document outlines the importance of rebalancing triggers and describes the various options available for implementation.

Importance of Rebalancing Triggers​

Rebalancing triggers serve several critical functions in liquidity provision strategies:

  1. Maintain Optimal Liquidity Distribution: They ensure that liquidity remains concentrated in the most effective price ranges.
  2. Risk Management: By adjusting positions based on market movements, they help mitigate potential losses and capitalize on opportunities.
  3. Gas Efficiency: Well-designed triggers can reduce unnecessary rebalancing, saving on transaction costs.
  4. Adaptability: They allow strategies to respond dynamically to changing market conditions.

Rebalancing Trigger Options​

The following trigger styles are available for implementation:

  1. Price Gap Trigger (Distance From Center of Positions)
  2. Range Inactive Trigger (Positions Inactive)
  3. Price Percentage Drift Trigger (Percentage Change From Position Range)
  4. One-Way Range Exit Trigger (Price Past Positions)
  5. None (No automatic triggering)

1. Price Gap Trigger​

Price Gap Trigger

Description: Triggers when the current price moves a set distance away from the center of the liquidity range.

Configuration:

  • tickDistanceFromCenter: The number of ticks (basis points) from the center price of positions to trigger setting new positions.

Use Case: Ideal for markets with consistent volatility where you want to maintain a specific price range around your liquidity.

2. Range Inactive Trigger​

Price Inactive Trigger

Description: Triggers when the current price moves outside the active liquidity range.

Configuration:

  • No additional configuration required beyond the common elapsedTendTime.

Use Case: Suitable for strategies that want to ensure liquidity is always active in the current price range.

3. Price Percentage Drift Trigger​

Price Gap Trigger

Description: Triggers when the price moves a certain percentage of the active liquidity range away from the center.

Configuration:

  • percentageOfPositionRangeToTrigger: The percentage of the range away to trigger new positions (1.0 = 100% of range).

Use Case: Effective for adapting to different market volatilities, as the trigger adjusts based on the size of the current range.

4. One-Way Range Exit Trigger​

Price Inactive One Way Trigger

Description: Triggers when the price moves out of the active range, but only in one specified direction (either above or below).

Configuration:

  • triggerWhenOver: Boolean indicating whether to trigger when price moves higher (true) or lower (false) than the current range.

Use Case: Useful for directional strategies or when you want to react differently to upward vs. downward price movements.

5. None​

Description: No automatic triggering based on price movements.

Configuration: No additional configuration required.

Use Case: For strategies that rely on other factors for rebalancing or manual intervention.

Common Configuration​

All trigger styles (except "None") share a common configuration parameter:

  • elapsedTendTime: The maximum time (in seconds) between strategy executions. If this time elapses without any other trigger conditions being met, the strategy will execute to update vault accounting.

Implementation Considerations​

  1. Gas Costs: More frequent rebalancing can lead to higher gas costs. Balance the need for responsiveness with transaction fee efficiency.
  2. Market Volatility: Choose and configure your trigger based on the expected volatility of the asset pair.
  3. Strategy Goals: Align your trigger choice with the overall objectives of your liquidity provision strategy.
  4. Backtesting: Thoroughly test different trigger configurations to optimize performance for your specific use case.

Conclusion​

Rebalancing triggers are essential for maintaining effective and efficient liquidity provision strategies. By carefully selecting and configuring the appropriate trigger mechanism, liquidity providers can optimize their positions, manage risk, and adapt to various market conditions. Regular monitoring and adjustment of trigger parameters may be necessary to ensure continued strategy effectiveness in evolving market environments.