How Does a Trader Confirm If an Exchange Uses ADL or Socialized Losses?
A trader should consult the exchange's official documentation, such as the help center, risk management guide, or the contract specifications. Reputable exchanges are transparent about their risk protocols.
The documentation will explicitly state whether they use an Insurance Fund/ADL system (the modern standard) or a Socialized Loss system (less common now). The presence of an ADL indicator on the trading interface is a clear sign of that system.
Glossar
Socialized Losses
Exposure ⎊ The concept of socialized losses, particularly within cryptocurrency derivatives and options trading, describes a scenario where the financial burden of counterparty failure or market collapse is disproportionately borne by a wider group than the direct participants.
Socialized Loss System
Mechanism ⎊ A Socialized Loss System, within cryptocurrency, options, and derivatives, represents a risk-transfer protocol where potential losses are distributed across a broader participant base rather than being solely borne by the initiating counterparty.
Socialized Loss
Mechanism ⎊ Socialized loss, within cryptocurrency derivatives and options trading, describes the distribution of losses across a broader participant base than those directly holding a losing position, often amplified by leveraged exposure and cascading liquidations.