Rebalancers

Rebalancers manage concentrated liquidity positions dynamically, solving the challenge of maintaining optimal liquidity ranges in rapidly changing market conditions. They automatically adjust position ranges to maximize fee-earning.

Detailed insights into our Rebalancer's innovative approach can be found in our in-depth technical exploration.

Properties

Rebalancers are:

Immutable.
Non-Custodial but triggering is Permissioned.
The contract relies on economic incentives, with the initiator of the rebalance earning a small reward.

A unique feature of Arcadia's Rebalancers is the innovative Hook structure. This extensible design allows account owners to implement custom logic and additional checks for their rebalancing strategies. The Hook system is open for development by both protocol users and third-party developers.

Strategies

Rebalancing is always a tradeoff between the opportunity cost of being out of range and the costs of rebalancing the position.

Finding the optimal strategy that determines when to rebalance, and which new lower and upper price to use, is a complex problem to solve, and it depends on multiple factors:

Type of liquidity pool (stable pool, correlated assets, volatile assets…)
Market conditions (bullish, bearish, flat)
Objectives of the position owner
Chain conditions e.g. gas price
…

The Rebalancer is made in such a way that it works with any rebalance strategy. The main logic is strategy agnostic: it takes as input an old position, the new upper price and the new lower price.

Trust Assumptions

The Rebalancer is a smart contracts that can only perform a single atomic action (rebalancing CLPs), it never holds assets and can never be used to withdraw assets from an Account.

But it does require input from a permissioned (whitelisted by the Owner, not Arcadia) user, further called the Initiator.

The initiator has to call the Rebalancer contract and has to determine:

When to rebalance
The range of the new Liquidity Position

A malicious initiator can still only rebalance via the Rebalancer, while it is a trusted role, they can never steal funds or Liquidity from the Account Owner.

The worst a malicious/incompetent Rebalancer can do, is trigger Rebalances at bad moments and move liquidity to non-optimal ranges, resulting in value lost due to swap fees, slippage and opportunity cost. But they can never “rug” the assets of an Account.

Since Initiators can be revoked/replaced at any time by the Account Owner, they are incentivised to rebalance optimally, to keep earning fees for their services.

The Rebalancer is permissioned, but that does not mean it is centralised. Each Account Owner can choose if they enable the Rebalancer at all. And if they do, they can choose who they set as initiator. Different initiators can for instance run different rebalance strategies, or ask different fee amounts for their services.

Costs and Fees

When rebalancing there are a number of costs/inefficiencies involved:

1. Initiator Fee: The initiator of the rebalance (who triggers it) receives an initiator fee ( $fee_{initiator}$ ) on the amount swapped. By using a fee on the amount swapped and not the principal, both strategies with infrequent big big rebaloances as srategies with frequent rebalances are feasable.
2. Swapping Fees: For a rebalance either some token0 has top be swapped to token1 or vica versa. The total swapping fee is maximally the fee of the pool itself (if you LP in a 0.01% pool the max swap fee is also 0.01%).
¨3. Slippage & leftovers: Both slippage and leftovers result in a less than optimal amount of liquidity minted (Leftovers are not really a cost since they are deposited back into the account, but they no longer earn yield). Slippage & Leftovers are capped by the maximal decrease in liquidity ( $MDL$ ), which compares the optimal rebalance (i.e., assuming no slippage and leftovers) to the current rebalance.
4. Impermanent Loss: Rebalancing realizes impermanent loss. It is not a cost due to rebalancing, but a loss in value compared to the initial position that is realized by rebalancing.

Note that 2. and 3. are capped to the downside (if exceeded the transaction reverts) but are most of the time much smaller or even positive (the swap can be done with a lower average fee than that of the pool and slippage can be positive as well).

Both the initiator $fee_{initiator}$ and the $MDL$ are set by the Initiator, they can differ for different strategies and different pools. The Initiator can change the rebalance parameters, but only advantageous to the Account Owner (lower fees, lower max slippage).