Rebalancing Up

Vault Function Overview

RebalanceUp is a vault function that gets called by a bot when the Asset / Liabilities (A/L) ratio falls below the preset threshold (REBALANCE_AL_FLOOR). In response, the lov-Strategy vault will sell vault reserve assets back to the token it borrowed in order to repay its debt to the liquidity provider and reduce its exposure to the collateral asset. This transaction will increase the A/L ratio (LTV goes down). The net effect is that Effective Exposure (EE) to the lov-Strategy vault reserve asset will be reduced on a per vault share basis.

Users should note that due to the leverage factor, the vault share price may fall if additional collateral is being withheld to back the debt due to deteriorating price. Similarly, if additional collateral is sold to repay debt to restore Target Effective Exposure, the lov-Strategy vault share price will be impacted.

A/L Factors That May Trigger RebalanceUp:

Price Volatility

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

Interest Rate Volatility

• The Interest Rate rises for the borrowed token

Outflows

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

Example RebalanceUp Scenario (described in stETH terms for simplicity)

lov-stETH WETH liabilities priced in stETH terms i.e. 1 stETH = 1 WETH REBALANCE_AL_FLOOR = 1.2

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 Assets: 9,000 - 1,800 = 7,200 stETH Liabilities: 6,000 stETH Current A/L: 1.2 Effective Exposure: 6X Leverage (1,200 stETH collateral // 7,200 stETH exposure)

Alice redeems 1,800 stETH from the lov-stETH Vault This pushes A/L ratio to the REBALANCE_AL_FLOOR of 1.2 RebalanceUp will be triggered to sell 3,600 stETH from wstETH reserves to repay 3,600 WETH

T2 Assets: 7,200 - 3,600 = 3,600 stETH Liabilities: 6,000 - 3,600 = 2,400 stETH Current A/L: 1.5 Effective Exposure: 3X Leverage (1,200 stETH collateral // 3,600 stETH exposure)