Advanced IL Reduction

Two Types of IL

There are two sources of impermanent loss in concentrated liquidity:

1. Natural IL: This happens from the price moving. It exists in every LP position. You cannot avoid it.

2. Rebalance IL: This happens when a manager swaps tokens during rebalancing. Selling the token that dropped, buying the token that rose. Locking in the loss.

Traditional managers create both types. MaxFi eliminates type 2 entirely.

How Swap-Induced IL Works

When a traditional manager rebalances:

1. Price dropped 5%. Your position is now heavy in the token that fell.
2. Manager removes liquidity. You have more of token A, less of token B.
3. Manager swaps token A for token B to get the right ratio.
4. This swap sells token A at its low price. That loss is now permanent.

If the price later recovers, it does not matter. You already sold at the bottom.

This happens every single rebalance. Dozens of times per year. Each one locks in a small loss.

MaxFi's Approach

MaxFi uses Snuggle's zero-swap rebalancing engine. When it rebalances:

1. Price dropped 5%.
2. MaxFi removes liquidity.
3. MaxFi places the new range one tick spacing away from the current price.
4. MaxFi deposits your tokens single-sided into that range. No swap needed.
5. Any leftover tokens stay in your position.

No sell-low-buy-high. The tokens you hold stay the same. If the price recovers, you benefit fully.

The Math

Over a year with 50 rebalances:

• Traditional: Each rebalance locks in 0.1-0.3% IL from the swap. Total: 5-15% extra IL per year.
• MaxFi: Zero swap IL. Only natural IL from price movement remains.

This is a massive difference. It means MaxFi positions keep more value even in volatile markets.

Stacking IL Reduction

You can reduce IL further with your settings:

Wider range: Less frequent rebalances means fewer times IL can occur.

Longer rebalance delay: Prices often bounce back. Waiting avoids unnecessary rebalances.

Pool selection: Stablecoin pairs have very low IL. Volatile pairs have more.

Use the backtest tool to see the IL impact of different settings on your chosen pool.

What You Learned

• Traditional rebalancing creates extra IL by selling low and buying high
• MaxFi's zero-swap engine avoids this entirely, cutting IL roughly in half
• Combining wider ranges with smart rebalance delays further reduces IL