How Do Decentralized Exchanges Attempt to Avoid Both ADL and Socialized Loss?

DEXs often use mechanisms like over-collateralization, where positions are required to have more collateral than necessary, or rely on external liquidators who are incentivized to close positions quickly before a deficit occurs. Some also use a decentralized insurance pool funded by a small portion of trading fees or liquidation penalties.

Does a Fully Collateralized Futures Market Eliminate the Risk of Socialized Loss?
What Is an ‘Insurance Fund’ and How Does It Relate to Liquidations on a Crypto Exchange?
What Happens If the Insurance Fund Runs out of Capital?
What Is “Auto-Deleveraging” (ADL) and How Does It Compare to Socialized Loss?
What Is ‘Auto-Deleveraging’ (ADL) and How Does the Insurance Fund Mitigate It?
Can an Exchange Use a Combination of ADL and Socialized Losses?
Can a Trader Declare Bankruptcy to Avoid Margin Call Deficits?
How Does Over-Collateralization Differ from Under-Collateralization in DeFi Derivatives?

Glossar