🪂Rebalancing the Position (Liquidation Brake)

The rebalancing mechanism

After a position is opened, the protocol employs an automated rebalancing mechanism to maintain stability and ensure the leverage ratio stays within predefined safe limits.

Rebalance is an automatic operation triggered when the leverage of a position reaches a predefined threshold (rebalance line). The protocol adjusts the leverage to bring it back to the rebalance line instead of liquidating a significant portion of the position. During this operation for xPOSITIONs:

• fxUSD is first redeemed from the Stability Pool.

• The underlying TOKEN is swapped for USDC to maintain system stability.

sPOSITIONs:

• Borrowed asset is first paid back by keepers

• The keeper gets fxUSD in return

1. Continuous Monitoring

External keepers continuously monitor market conditions and the leverage ratios of all open positions. If market fluctuations cause a position to drift outside safe leverage thresholds, the rebalancing mechanism is activated.

2. Reducing Leverage

1. xPOSITION & fxMINT - Via fxUSD Burning

If leverage exceeds the safe limits—such as when ETH or BTC prices drop—the protocol automatically burns a portion of the fxUSD associated with the xPOSITION. The collateral backing the burned fxUSD is sold for fxUSD or USDC and returned to the Stability Pool. This adjustment reduces the leverage ratio while maintaining the user’s exposure to the underlying asset, effectively avoiding liquidation.

This automated rebalancing process eliminates the need for manual interventions and prevents forced liquidations, offering users a more secure and reliable way to manage positions in volatile markets.

1. sPOSITION - Via debt repayment

If leverage exceeds the safe limits—such as when ETH or BTC prices surge—the protocol automatically repay a portion of the debt associated with the sPOSITION. The fxUSD backing the repaid debt is given to the keeper processing the operation. This adjustment reduces the leverage ratio while maintaining the user’s exposure to the underlying asset, effectively avoiding liquidation.

This automated rebalancing process eliminates the need for manual interventions and prevents forced liquidations, offering users a more secure and reliable way to manage positions in volatile markets.

Example of a rebalancing operation

Alice opens a 5x position with 1ETH when ETH trades at $3000. She will be rebalanced when ETH price falls 9.09%, which is $2727 (LTV=88% - see Risk parameters). This is how her position looks at the opening.

ETH Price	xPosition size (USD)	Position size (USD)	Real time Leverage	fxUSD debt	LTV
$3000	$3000	$15000	5.00	$12000	80.00%

Lousy luck, ETH price collapsed by 10% and reached $2700: Alice's xPOSITION will be rebalanced.

Before rebalancing, this is how her position now looks:

ETH Price	xPosition size (USD)	Position size (USD)	Real time Leverage	fxUSD debt	LTV
$2700	$1500	$13500	9.00	$12000	88.89%

The rebalancing process must burn enough fxUSD from her debt to bring her LTV back to 88%. The needed amount to burn can be calculated using the following formula.

$$fxUSDtoBurn = ( Debt - PositionSize * TargetLTV)/(1-TargetLTV)$$

The redeeming bounty (see Risk parameters) is added to this amount.

This is how the rebalancing process occurs:

1. $1000 worth of fxUSD are burnt from the stability pool and deducted from Alice’s debt

2. The corresponding amount of wsETH collateral + the keeper bounty is redeemed by the keeper.

3. The equivalent amount of fxUSD or USDC is returned to the Stability Pool.

Alice'sAfter the rebalancing process, Alice's position looks like this:

ETH Price	xPosition size (USD)	Position size (USD)	Real time Leverage	fxUSD debt	LTV
$2700	$1500	$12500	8.33	$11000	88%

Her real-time leverage was stabilized to prevent her from liquidation. She kept market exposure. If the market recovers back to $3000:

ETH Price	xPosition size (USD)	Position size (USD)	Real time Leverage	fxUSD debt	LTV
$3000	$2889	$13889	4.81	$11000	79.20%

Read More:

🟦What price drop would it require for my fxMINT or xPOSITION to be rebalanced/liquidated?