Liquidity Performance Analysis (ALM 2.0 vs Traditional ALMs)

Background

A51 Finance uses a unique trailing mechanism for rebalancing the liquidity positions. We call this ALM 2.0. It’s because instead of shifting the liquidity positions with each shift in the market price, the position trails it waiting for it to come back in range and to avoid unnecessary IL.

This mechanism differs from the traditional ALMs where the position shifts with the market price continuously incurring IL.

The rebalance method that A51 uses is different in the sense that when ALMs rebalance, they swap some amount of tokens from the position to bring the position back in range. This is called active rebalancing.

In trailing rebalance, the system takes the converted position and puts it right behind the updated current pool price.

The benefit is that it then waits for the market to naturally fall back in without deliberately swapping the asset and encountering slippage cost from the position and rapid conversion of impermanent to permanent loss.

Summary

This difference in the rebalancing mechanisms of ALM and ALM 2.0 led us to analyze and observe it in action.

In this comparative analysis, we deposited a similar amount of liquidity according to the price ratio on Gamma and A51.

The pool was WBTC/ETH 0.3% on Uniswap V3 with similar liquidity strategies for 3 weeks.

Evaluation

The analysis began on 12 June 2024.

Initial strategy range:

• Upper range: 19.508 ETH per WBTC
• Lower range: 18.153 ETH per WBTC

Initial invested capital:

• Gamma AUM: $134.11 (Rebalances = 0)
• A51 AUM: $131.85 (Rebalances = 0)

Position status (23 June 2024)

• Gamma AUM: $127.90 (Rebalances = 6)
• A51 AUM: $127.36 (Rebalances = 0)
• A51 % change from initial deposit = -3.405%
• Gamma % change from initial deposit = -4.630%

Analysis:

The market went down causing Gamma to execute several rebalances on its strategy according to changing prices.

While the A51 position wasn’t rebased because it had a cool-down period between the main range and the rebase threshold.

Position status (25 June 2024)

• Gamma AUM: $121.72 (Rebalances = 8)
• A51 AUM: $123.67 (Rebalances = 1)
• A51 % change from initial deposit = -6.204%
• Gamma % change from initial deposit = -9.238%

Analysis:

As the market kept plummeting, we saw the Gamma position further rebalancing.

The A51 position was rebalanced for the first time.

Gamma at this point has encountered permanent loss as well as compounded the earned fees back to the position. It means that the earned fees were also used up to cover the losses.

Another aspect to note is that at this stage A51 position for the first time is ahead in AUM value. Although our strategy on Gamma was relatively ahead in AUM value at the start of the experiment which signifies that even if given a head start to an active rebalancing system, it will lose against the systems which are not actively swapping the asset to rebalance.

Position status (3 July 2024)

• Gamma AUM: $126.72 (Rebalances = 10)
• A51 AUM: $127.69 (Rebalances = 2)
• A51 % change from initial deposit = -3.155%
• Gamma % change from initial deposit = -5.510%

Analysis:

At the end of the experiment, both positions were in net negative largely because during the experiment, the market kept going in a downward direction.

But this also presented us with an opportunity to see which protocol had the best means to fight against impermanent loss.

Conclusion

It’s evident that the A51 position fought IL through its rebalancing system better.

An important thing to note is that the results nullify the pros of active rebalancing in a bad market as the consecutive swaps and slippage eat up the capital and earned fees.

The A51 position in total earned ~$3.42 of fees (compounded + uncompounded). Since there have been very few rebalances, we can assume that there are still fees yet to be compounded back to AUM.

The fees earned by the Gamma position are unknown because of the lack of this metric on its dApp. However, we can assume that most of the earned fees have already been compounded due to frequent rebalances.

User Testimonials

Here is the feedback from some seasoned A51 users who came forward to share their experiences with traditional ALMs and how A51’s ALM 2.0 is different.