Auto-Deleveraging (ADL)
An exchange mechanism that forcibly reduces profitable traders' opposite positions to cover a liquidation shortfall an insurance fund can't absorb.
Auto-deleveraging (ADL) is an exchange mechanism that forcibly reduces the positions of traders holding profitable positions on the opposite side of a liquidated trade, specifically to cover a shortfall when a liquidation's collateral and the exchange's insurance fund (see Kaavon's "Insurance Fund (Exchange)" glossary definition) both prove insufficient.
ADL is generally the mechanism of last resort, used only after other safeguards are exhausted, and is a real, documented risk specifically for highly profitable leveraged positions during extreme market volatility — a trader can have a winning position partially or fully closed involuntarily, with no action of their own having caused it.
Examples
- A trader holding a highly profitable leveraged position during extreme volatility can have part of it involuntarily closed through auto-deleveraging, with no fault of their own.
- Auto-deleveraging is generally the mechanism of last resort, used only after a liquidation's collateral and the exchange's insurance fund both prove insufficient.