Auto Deleveraging

Auto Deleveraging is a mechanism used by some derivative exchanges to close out the positions of profitable traders against the positions of bankrupt traders when the insurance fund is insufficient. This ensures that the system does not collapse due to bad debt that cannot be covered by the insurance fund.

When this occurs, the profitable traders are forced to close their positions at the bankruptcy price of the losing trader. This is a last-resort measure that protects the overall system integrity but can be disruptive for profitable traders.

It is a controversial feature because it socializes the risk of a platform's inability to manage its own liquidations. Exchanges use it to maintain system-wide solvency during extreme market conditions where volatility outpaces the liquidation engine.

It is a key element of the protocol physics that users must understand when trading on platforms that employ this method.