What Are the Mechanics of an “Auto-Deleveraging” (ADL) System on Crypto Derivatives Exchanges?

Auto-deleveraging (ADL) is a last-resort mechanism used by some crypto exchanges when a liquidated position cannot be closed without causing a loss to the exchange's insurance fund. If a position is closed at a price worse than the bankruptcy price, the ADL system automatically closes the positions of profitable traders on the opposite side of the trade, starting with the most profitable and highly leveraged.

These traders are "deleveraged" at the bankruptcy price of the liquidated order, effectively forcing them to realize their profits to cover the exchange's loss.