Explain the Difference between ‘Liquidation’ and ‘Auto-Deleveraging’.
Liquidation is the forced closure of an under-collateralized position whose margin has dropped below the maintenance level. It is a direct result of a trader's own losses.
Auto-deleveraging (ADL) is the forced reduction of a profitable, well-collateralized position to cover a deficit left by an unsuccessful liquidation that the insurance fund could not cover. Liquidation is a first-line defense; ADL is a last resort.
Glossar
Unsuccessful Liquidation
Liquidation ⎊ The term "Unsuccessful Liquidation," within cryptocurrency derivatives, options trading, and broader financial derivatives contexts, denotes a scenario where attempts to close out a position, typically due to a margin call or forced closure event, fail to fully execute or resolve the associated financial obligations.
Forced Reduction
Trigger ⎊ Forced reduction, within cryptocurrency derivatives and options trading, represents the automatic liquidation of positions when margin maintenance requirements are breached, a critical risk management function.
Liquidation
Trigger ⎊ Liquidation in cryptocurrency derivatives represents the forced closure of a trading position due to insufficient margin to cover accruing losses, a critical event impacting market stability.