Automatic Deleveraging (ADL)

Automatic Deleveraging is a risk management tool that automatically triggers when an exchange's insurance fund is insufficient to cover a bankrupt trader's losses. When a position cannot be liquidated at a price that covers the debt, the system selects the most profitable and highly leveraged traders to act as the counterparty to the bankrupt position.

The system forcibly closes these profitable positions at the bankrupt trader's bankruptcy price, effectively transferring the position and the associated risk to the profitable trader. This ensures the exchange remains solvent and prevents a cascade of defaults.

It is a controversial mechanism because it creates uncertainty for profitable traders who may have their positions closed against their will. ADL is primarily found in crypto-native derivatives platforms where extreme volatility requires rapid, automated intervention to maintain market integrity.