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Rebalancing
Although concentration and the use of an oracle are sufficient for the protocol to efficiently market make, it lacks the simplicity of standard constant product pools where the total value of each asset in a pool are always equal. To add a similar property while maximizing profit, the protocol rebalances its pools by adjusting their liquidity. This adjustment of liquidity occurs on every trade and/or change in oracle price according to the following formulae.
To decrease liquidity for x:
To increase liquidity for x:
where K is the total amount of liquidity, p is the price of x provided by the oracle, and z is the parameter that determines the magnitude of the adjustment. For example, when x comprises less than 50% of the Coverage Ratio of the pooled assets, the market maker will decrease liquidity for buyers of x and increase liquidity for sellers of x in an effort to regain balance. This will incentivize traders to sell against the pool while discouraging them from buying, ensuring that the pool balance regresses to the invariant curve.
The system health of a pool could be measured by the global equilibrium coverage ratio
, which is the coverage ratio when all tokens return to the equilibrium state.
Last modified 7mo ago