What Is the Difference between “Auto-Deleveraging” and Using an Insurance Fund?
The insurance fund is the primary buffer, absorbing losses from liquidations that fail to execute at a price better than the bankruptcy price. It is the first defense against negative equity.
Auto-Deleveraging (ADL) is a secondary, last-resort mechanism. ADL is triggered only when the insurance fund is depleted or insufficient to cover a large loss.
It automatically reduces the open positions of profitable traders to cover the deficit left by the bankrupt trader, effectively socializing the remaining loss among the most profitable counterparties.
Glossar
Crypto Insurance Fund Management
Fund ⎊ This capital pool is specifically earmarked to cover losses arising from smart contract failures, oracle manipulation, or extreme market events that exceed standard collateralization buffers.
Deleveraging Formula
Calculation ⎊ This refers to the specific mathematical procedure employed by a derivatives platform to reduce a trader's exposure when their margin coverage falls below the required maintenance level.
Auto Exercise Functionality
Automation ⎊ Auto Exercise Functionality is a standard operational feature offered by derivatives exchanges that automatically executes an option contract at expiration if it meets predefined in-the-money criteria.
Exchange Deleveraging Mechanism
Mechanism ⎊ An exchange deleveraging mechanism is a risk management tool used by derivatives exchanges to reduce or close out leveraged positions when a trader's margin falls below maintenance levels.
Insurance Fund History
Mitigation ⎊ Insurance Fund History within cryptocurrency derivatives represents a capital reserve established to absorb potential losses arising from systemic risk or counterparty default, functioning as a crucial component of exchange-level risk management.
Exchange Auto Closure
Closure ⎊ An exchange auto-closure represents a pre-programmed mechanism within cryptocurrency derivative platforms, options exchanges, and broader financial derivative ecosystems designed to automatically liquidate positions when specified risk thresholds are breached.
Profit Driven Deleveraging
Mechanism ⎊ Profit driven deleveraging is a specific risk management mechanism employed by derivatives exchanges to manage counterparty risk.
DeFi Insurance Fund
Resilience ⎊ A DeFi Insurance Fund is a pool of capital, typically held in a smart contract, designated to cover unexpected losses arising from protocol failures, smart contract bugs, or oracle malfunctions impacting decentralized derivatives.
Excessive Insurance Fund Size
Reserve ⎊ Excessive Insurance Fund Size refers to the accumulation of capital within a derivatives exchange's safety mechanism beyond what is statistically required to cover standard default scenarios.
ADL Auto Deleveraging
Mechanism ⎊ Auto Deleveraging (ADL) is a risk management protocol implemented by cryptocurrency derivatives exchanges to manage counterparty risk when a liquidated position cannot be fully covered by the exchange's insurance fund.