Auto-Deleveraging (ADL) represents a critical risk management protocol implemented on certain crypto derivatives exchanges, acting as a last-resort mechanism to manage extreme market conditions. It is specifically activated when an insurance fund lacks sufficient capital to cover losses from a liquidated position. The function of ADL is to prevent systemic market instability by distributing remaining losses.
Mechanism
The ADL system automatically identifies profitable opposing positions held by other traders on the exchange. It then reduces a portion of their unrealized gains proportionally, effectively deleveraging their positions to cover the deficit from the unfillable liquidated order. This process is fully automated, based on an internal ranking system that prioritizes accounts with high profit and high leverage for deleveraging.
Methodology
This methodology functions as a systemic safety net, distributing unmanageable losses across a broader base of profitable, highly leveraged participants. Its design aims to maintain exchange solvency and market order when standard liquidation processes are insufficient. The approach is a direct application of centralized risk control within the volatile crypto derivatives trading environment, minimizing cascading failures.
Robust crypto options risk frameworks mitigate post-execution exposure via a tiered defense of portfolio margining, insurance funds, and auto-deleveraging.
CME-cleared options centralize and mitigate counterparty risk through a regulated default waterfall, while offshore options decentralize it into platform-specific insurance funds and auto-deleveraging mechanisms.
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