How Does an Auto-Deleveraging (ADL) System Function in a Futures Exchange?
The Auto-Deleveraging (ADL) system is a last-resort mechanism used when the insurance fund cannot cover a liquidation loss. The system automatically deleverages (reduces) the positions of opposing traders who have a high-profit and high-leverage position.
The priority for deleveraging is based on a ranking system. This process is necessary to close the insolvent position and maintain the solvency of the exchange, but it is disruptive to the deleveraged traders.
Glossar
Crypto Derivatives
Synthetic Instruments ⎊ Crypto Derivatives are complex financial contracts whose value is derived from an underlying crypto asset, index, or rate, encompassing futures, options, swaps, and perpetual contracts traded on digital asset exchanges.
Insurance Fund
Fund ⎊ In the context of cryptocurrency derivatives, options trading, and financial engineering, an Insurance Fund represents a dedicated pool of assets designed to mitigate systemic risk within a specific protocol or trading environment.
Deleveraging
Reduction ⎊ This process involves systematically decreasing the notional exposure or the overall leverage ratio within a trading account or fund structure.