# Rebalancing Down

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### 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 (<mark style="color:green;">REBALANCE\_AL\_CEILING</mark>). 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\ <mark style="color:green;">REBALANCE\_AL\_CEILING</mark> = 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 <mark style="color:green;">REBALANCE\_AL\_CEILING</mark> 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)