Reinitialization
Last updated
Last updated
The protocol may sometimes need to execute the reinitialize() command to restore the 1:1 ratio between spot wstETH and ETH short position holdings. Reinitialization closes the protocol's ETH short when it is underwater and replaces it with a new one comprising 50% of the collateral assets. Although the protocol accumulates assets in a helpful ratio during , reinitialization may sometimes be required, as explained below.
According to the principle of , each VBUSD should be backed by 1 USD worth of real assets: half spot wstETH holding and half 1x ETH short. These holdings should add to 1 USD/VBUSD even with ETH price fluctuation, as long as reinitialization is performed.
However, this principle only holds up as long as the protocol's 1x ETH short does not get liquidated. VBUSD's collateralization is in jeopardy if time passes without the protocol holding an ETH short position to offset its spot wstETH holdings. A 1x short has an initial liquidation price of ~double the entry price, so the position must be reinitialized before ETH reaches that liquidation price.
When reinitialization is executed, the protocol closes its current ETH short and then immediately opens another one with half of the current VBUSD collateral, restoring the ratio of spot:short holdings to 1:1.
The protocol has a Keeper system to avoid reinitializing too often but still ensure that it happens before the position is liquidated. Keepers are incentivized bots that run the contract's reinitializeShort() function when the short equity reaches a certain threshold. This threshold is 30% equity: when the short position is worth 30% or less of its original value, or when the ETH price has risen by ~70%, Keepers trigger reinitialization.
The admin has the option to pause the reinitialize() function and all other pathways leading to rebalancing and perform reinitialization manually. This would be done if the ETH --> wstETH swap on Arbitrum would cause the protocol to take too much slippage loss using the automatic reinitialize() method.