How Does ‘Auto-Deleveraging’ (ADL) Relate to the Insurance Fund?

ADL is a mechanism of last resort, only triggered when the insurance fund is insufficient to cover losses from a bankrupt position. It automatically deleverages (reduces the position of) profitable traders on the opposite side of the bankrupt trade.

The insurance fund's primary purpose is to absorb these losses first, thereby minimizing the need for the disruptive ADL process. A large, healthy insurance fund reduces the likelihood of ADL occurring.