What Is ‘Auto-Deleveraging’ (ADL) and How Does the Insurance Fund Mitigate It?
Auto-deleveraging (ADL) is a mechanism where, if the insurance fund cannot cover the losses from a liquidation, profitable traders' positions are reduced (deleveraged) to cover the deficit. The insurance fund's primary role is to absorb these deficits first.
By maintaining a large fund, the exchange minimizes the chance that ADL needs to be activated, protecting profitable traders.
Glossar
Insurance Fund Status
Status ⎊ Insurance Fund Status reflects the current capital level and operational readiness of the mechanism designed to cover uncollateralized losses from trader defaults.
Auto Exercise Feature
Trigger ⎊ Auto exercise features within cryptocurrency options and financial derivatives represent a pre-defined condition initiating automatic exercise of an option contract.
Deleveraging Risk Control
Mechanism ⎊ Deleveraging risk control refers to automated systems designed to reduce systemic risk within a derivatives exchange.
Insurance Fund Exhaustion
Trigger ⎊ Insurance Fund Exhaustion within cryptocurrency derivatives signifies the depletion of capital allocated to cover potential losses from leveraged positions, particularly in perpetual swaps and options contracts.
Deleveraging Protection
Mechanism ⎊ Deleveraging protection refers to automated systems designed to manage counterparty risk in derivatives markets, particularly on cryptocurrency exchanges.
Insurance Fund Size Impact
Buffer ⎊ The size of this dedicated pool of capital directly influences the platform's capacity to absorb losses from a major default event without impacting other solvent participants.
Insurance Fund Size Disclosure
Disclosure ⎊ The formal requirement for platforms to report the aggregate size of their insurance or risk mitigation pools to users and relevant oversight bodies.
Deleveraging Queue Ranking
Ranking ⎊ The deleveraging queue ranking establishes the sequence for auto-deleveraging positions on a derivatives platform.
Automated Deleveraging System
Mechanism ⎊ An automated deleveraging system is a risk management protocol implemented by cryptocurrency derivatives exchanges, primarily to manage counterparty risk when a liquidated position cannot be fully covered by the exchange's insurance fund.
Insurance Fund Staking
Staking ⎊ This process involves locking up a designated amount of cryptocurrency collateral within a protocol's designated insurance pool, typically managed by a smart contract.