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What Mechanisms Do Crypto Exchanges Use to Manage Liquidation Risk?

Insurance funds, auto-deleveraging (ADL), and tiered liquidation protocols are used to manage systemic liquidation risk.
Greeks.Live21.11.25

What Mechanisms Do Crypto Exchanges Use to Manage Liquidation Risk?

Crypto exchanges employ several mechanisms, including insurance funds, auto-deleveraging (ADL) systems, and tiered liquidation protocols. Insurance funds cover losses when a liquidated position cannot be closed above the bankruptcy price.

ADL is a last-resort system that automatically reduces the leverage of profitable traders to cover losses of bankrupt accounts. Tiered liquidation allows for partial liquidation before full closure.

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