How Do Exchanges Prevent 'Socialized Losses' That Can Occur from Large Liquidations? ⎊ Path

How Do Exchanges Prevent ‘Socialized Losses’ That Can Occur from Large Liquidations?

Exchanges use mechanisms like insurance funds and auto-deleveraging (ADL) systems to prevent socialized losses. An insurance fund covers losses that exceed the liquidated collateral.

ADL automatically reduces the leverage of profitable traders to cover the deficit from the liquidated position, ensuring market stability.

How Does an Auto-Deleveraging (ADL) System Function in a Futures Exchange?

What Is the Risk of ‘Auto-Deleveraging’ (ADL) in High-Leverage Perpetuals?

What Is the Difference between Cross Margin and Isolated Margin in Perpetual Swap Trading?

What Is the Difference between “Auto-Deleveraging” and Using an Insurance Fund?

What Is ‘Auto-Deleveraging’ (ADL) and How Is It Used by Crypto Exchanges?

Does High Leverage Increase or Decrease the Effective Transaction Cost of a Trade?

What Are the Mechanics of an “Auto-Deleveraging” (ADL) System on Crypto Derivatives Exchanges?

How Do Exchanges Use ‘Auto-Deleveraging’ (ADL) in Extremely Volatile Markets?

Glossar

Losses

Impairment ⎊ Losses in cryptocurrency, options, and derivatives trading represent a reduction in the recorded carrying value of an asset due to declines in market prices or counterparty creditworthiness.

Leveraged Derivatives

Mechanism ⎊ Leveraged derivatives within cryptocurrency and broader financial markets represent contracts whose value is derived from an underlying asset, amplified by borrowed capital; this magnification of exposure allows traders to control a larger position with a smaller initial investment, increasing both potential gains and losses.