🧙♂️Auto-rebalance & Auto-compound
Everything you need to know about auto-rebalance & auto-compound to optimize yield risk vs returns
Auto-rebalancing
How does Auto-rebalance work?
Auto-rebalance is a Hawksight feature that automates the management of liquidity positions within a liquidity pool (LP). It strategically adjusts the distribution of assets between different tokens in a liquidity pool to maintain an optimal position within the market’s price range. Auto-rebalancing ensures your position is in-the-money, continuously generating yields from token trading volume & fees.
What happens when the token price drops below the range? (Example: SOL-USDC)
In a SOL-USDC liquidity pool, if the market price of SOL drops below the minimum predefined price range, the auto-rebalance feature triggers due to the position being out of range and not generating yield from fees. In this scenario, your USDC is partially converted into SOL reflective of SOL's decreased value. Autorebalance repositions your LP position to be within a range that remains active to generate yield.
What happens when the token price spikes above the range? (Example: SOL-USDC)
In a SOL-USDC liquidity pool, if the market price of SOL rises above the maximum predefined price range, the auto-rebalancing feature triggers due the position being out of range and not generating yield from fees. In this scenario, your SOL is partially converted into USDC, reflecting SOL’s increased value. Autorebalance repositions your LP position to be within a range that remains active to generate yield.
Should I use Default or Customized Price Ranges?
If you are a beginner, we suggest using Default Price Ranges, which are optimized for yield based on the token’s historical performance (Disclaimer: Past performance is not always a good indicator of future performance, so please review & understand the Safety & Risk Factors displayed for each yield strategy).
If you are an experienced DeFi user, you can customize your own price range based on your expectation of price movements, customize rebalancing strategies, and even transparently simulate potential risk & returns on HawkAI
We highly recommend joining the Hawksight community Discord to (https://discord.com/invite/7ZDVwAaqWk) to learn more from peers about different LP strategies from custom price ranges, auto-rebalancing, and auto-compounding.
Tradeoffs of Wide vs. Narrow vs. Asymmetric Price Ranges Wide price ranges provide more resilience against market volatility by having a larger spread of potential price movements. This broader approach leads to less frequent rebalancings, offering a stable, but potentially lower yield as liquidity is distributed over a wider price range.
Narrow price ranges provide concentrated liquidity that usually results in higher APY yields due to higher fee accrual from efficient & focused liquidity providing. However this comes with higher risk of LP positions being out-of-range due to price volatility (especially when token prices are volatile), which could mean more frequent rebalancing and possibly result in greater exposure to impermanent/divergence loss.
Asymmetric Price Ranges is a customized strategy when users intentionally skew price ranges to be broader on one side (higher range on the upside to capture price spikes, or lower on the downside if expecting a price dip). This advanced approach helps liquidity providers continually generate fees by protecting against token price decreases or capturing upside of token price increases.
Impermanent Loss or Divergence Loss
Impermanent loss occurs when the relative price of assets in a liquidity pool diverges from the price at the time of deposit. Although termed 'impermanent,' it can become a realized loss if the position is rebalanced or withdrawn at these divergent prices (especially token price is out-of-range from the initial LP price range). In detail, it occurs when the price ratio of the tokens in a liquidity pool diverges from the ratio at the time of deposit. This divergence primarily stems from significant price changes in one or both of the pool's tokens — the larger the price shift, the greater the potential loss.
Impermanent loss or divergence loss can be mitigated by
Liquidity providing in Wide or Asymmetric price ranges (See Tradeoffs of Wide vs. Narrow vs. Asymmetric Price Ranges above), especially for tokens with volatile price action
Monitoring token price action for potential volatility or significant price action, while making sure (or customizing) LP positions are comfortably within range of token price action
As a beginner, focusing on LP’ing in stable pools instead of volatile pools (Hawksight has a Filter function for Stable vs Volatile pools). Stable pools have lower risks of impermanent loss because the token pool ratios typically have a stable value and are often tied to each other. (However please remember to also read the Safety & Risk Factors of each strategy to have a full understanding of the risks vs. return of each yield strategy.)
Auto-compound
How does Auto-compound work?
Auto-compound in Hawksight is a feature that automatically reinvests trading volume fees or rewards back into your position. By doing so, the compounding effect should enhance overall returns on the liquidity provided. It's a hands-off approach that allows liquidity providers to benefit from the cumulative growth of their return.
Can I turn off Auto-compound?
Our contributors are currently prioritizing & working on this feature. Announcements coming soon.
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