Automated deleveraging (ADL) is a risk management mechanism employed by cryptocurrency derivatives exchanges to manage counterparty risk. When a trader’s position falls below the maintenance margin and cannot be liquidated at a price better than bankruptcy, the ADL system activates. This process automatically reduces the positions of profitable traders to cover the losses of the bankrupt account.
Liquidation
Unlike traditional liquidation where a position is sold on the open market, ADL directly transfers a portion of the profitable counterparty’s gains to cover the shortfall. The system ranks profitable traders based on their profit and leverage, selecting those with the highest leverage for deleveraging first. This approach prevents a large-scale market sell-off that could occur during a traditional liquidation cascade.
Consequence
The primary consequence of ADL is the reduction of systemic risk for the exchange and its participants. While it ensures the solvency of the platform, it introduces counterparty risk for profitable traders, who may see their positions reduced without their direct consent. This mechanism is designed to maintain market stability during extreme volatility events where the insurance fund is insufficient to cover losses.
Meaning ⎊ Portfolio-Level Risk Optimization provides the mathematical framework to synchronize diverse crypto derivative exposures, ensuring systemic stability.
