Rebalancing Down

Vault Function Overview

RebalanceDown is a vault function that gets called by a bot when the Asset / Liabilities (A/L) ratio rises above the preset threshold (REBALANCE_AL_CEILING). In response, the lov-Strategy vault will supply its vault reserve asset as collateral to a liquidity provider to increase its debt and exposure to the collateral asset. This transaction will reduce the A/L ratio (LTV goes up). The net effect is that Effective Exposure (EE) to the lov-Strategy vault reserve asset will be increased on a per vault share basis.

A/L Factors That May Trigger RebalanceDown:

Price Volatility

• Spot price of vault reserve asset increases relative to the borrowed token

• Value of vault reserve asset increases due to accrued yield, rebases, or farming rewards

Interest Rate Volatility

• The Interest rate falls for the borrowed token

Inflows

• New user deposits of the vault reserve asset e.g. sUSDe or wstETH

Example RebalanceDown Scenario (described in stETH terms for simplicity)

lov-stETH WETH liabilities priced in stETH terms i.e. assume 1 stETH = 1 WETH REBALANCE_AL_CEILING = 1.6

T0 Assets: 9,000 stETH Liabilities: 6,000 stETH Target A/L: 1.5 Effective Exposure: 3X Leverage (3,000 stETH collateral // 9,000 stETH exposure)

T1 Starting Assets: 9,000 + 600 = 9,600 stETH Starting Liabilities: 6,000 stETH Current A/L: 1.6 Effective Exposure: 2.67X Leverage (3600 stETH collateral // 9600 stETH exposure)

Bob deposits 600 stETH to the lov-stETH Vault This pushes A/L ratio to the REBALANCE_AL_CEILING of 1.6 RebalanceUp will be triggered to borrow 1,200 WETH to add 1,200 stETH to wstETH reserves

T2 Assets: 9,600 + 1,200 = 10,800 stETH Liabilities: 6,000 + 1,200 = 7,200 stETH Current A/L: 1.5 Effective Exposure: 3X Leverage (3,600 stETH collateral // 10,800 stETH exposure)