Rebalance is the process of re-allocating assets between underlying yield sources of a strategy.
The strategy can enhance its overall profitability by reallocating funds from one protocol to another. This process, known as rebalancing, is triggered when there are changes in the APY of the protocols. For example, if a strategy has equal assets in two protocols, A and B, both having an APY of 5%, and protocol B's APY has increased to 10%, the strategy will reallocate all its funds to protocol B.
This rebalance is performed only between strategy's active yield sources, listed in the strategy description page.
Rebalance operations reallocate your funds to another yield source within a strategy, increasing or preserving profitability.
Periodic reallocation only takes place when it can enhance your profitability, considering overhead costs and the impact on strategy APR. As a part of the rebalance, tokens of the underlying protocol that's being rebalanced may be converted into different tokens of the target protocol.
Initiation of rebalancing occurs off-chain as it requires consideration of numerous factors and involves complex calculations:
the cost of exchange,
dissolution and formation of LP tokens,
the impact on the APR of the current and target yield sources,
current gas cost.
After profitability calculations, the corresponding method is initiated on the smart contract of the strategy to execute the operation. This can be considered as a centralization point, and so in the near future decisions about when to perform the rebalance will be delegated to DAO.
Organic rebalance occurs whenever a new user deposits/withdrawals funds into the strategy. The funds are automatically allocated to the most profitable protocol available at the time. Similarly, when a user withdraws funds from the strategy, the funds are removed from the least profitable protocol. This organic flow ensures that funds naturally gravitate towards the most performant yield source.