🪂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 an xPOSITION reaches a predefined threshold. The protocol adjusts the leverage by redeeming a portion of fxUSD to bring it back to the rebalance line. During this operation:
fxUSD is first redeemed from the Stability Pool.
The underlying TOKEN is swapped for USDC to maintain system stability.
1. Continuous Monitoring
The protocol continuously monitors 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 via fxUSD Burning
If leverage exceeds the safe limits—such as when ETH prices drop—the protocol automatically burns a portion of the fxUSD associated with the xPOSITION. The stETH 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.
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%). This is how her position looks at the opening.
$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:
$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.
The redeeming bounty (see Risk parameters) is added to this amount.
This is how the rebalancing process occurs:
$1000 worth of fxUSD are burnt from the stability pool and deducted from Alice’s debt
The corresponding amount of wsETH collateral + the keeper bounty is redeemed by the keeper.
The equivalent amount of fxUSD or USDC is returned to the Stability Pool.
Alice'sAfter the rebalancing process, Alice's position looks like this:
$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:
$3000
$2889
$13889
4.81
$11000
79.20%
Read More:
🟦What price drop would it require for my xPOSITION to be rebalanced/liquidated?Last updated