In What Market Conditions Is ADL Most Likely to Occur?
ADL is most likely to occur during periods of extreme, rapid market volatility, especially sharp price crashes or spikes, where a large number of highly leveraged positions are liquidated simultaneously. This creates a high volume of deficit liquidations that quickly overwhelm the insurance fund's capacity, forcing the system to resort to auto-deleveraging.
Glossar
Market Conditions
Dynamic ⎊ Market conditions describe the prevailing state of the financial environment, encompassing factors like price volatility, trading volume, liquidity depth, and general investor sentiment across cryptocurrency and derivatives markets.
Deficit Liquidations
Mechanism ⎊ Deficit Liquidations are the procedures executed when a position's margin collateral is insufficient to cover losses, resulting in a shortfall that must be addressed by the system.
Price Crashes
Event ⎊ Price Crashes represent rapid, significant downward movements in cryptocurrency asset valuations, often triggering cascading liquidations across highly leveraged derivatives positions.
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.
Leveraged Positions
Position ⎊ In cryptocurrency and derivatives markets, a leveraged position signifies an exposure exceeding the initial capital outlay, achieved through instruments like futures contracts, options, or margin trading.