Auto Deleveraging Protocols

Auto-deleveraging (ADL) is a mechanism where the protocol automatically closes the most profitable positions against the most underwater positions to neutralize risk when the insurance fund is exhausted. This is a last-resort measure to prevent the protocol from going bankrupt.

The traders whose positions are closed receive their profit, but their position is effectively terminated by the system. This can be frustrating for traders who wanted to keep their positions open, but it is necessary to stop the spread of bad debt.

ADL is a core component of the risk management strategy for many perpetual swap platforms. It is designed to be fair, targeting the riskiest positions first.

Understanding how ADL works is crucial for traders who hold large, profitable positions during volatile market events. It is a technical solution to a fundamental problem in derivative trading.