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

Exchanges use insurance funds to cover deficits and Auto-Deleveraging (ADL) to reduce profitable traders' leverage.
Greeks.Live14.11.25

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.

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