Auto-Deleveraging (ADL)
Automatic position matching when liquidations exceed insurance fund capacity
Auto-Deleveraging (ADL)
When standard and backstop liquidations fail to cover bad debt exceeding the Insurance Fund's limit, the system escalates to Auto-Deleveraging. This mechanism forcibly matches underwater positions with profitable positions from solvent accounts in the same market.
How ADL Works
Ranking System
- Underwater accounts are ranked by bad debt risk
- Profitable accounts are ranked by unrealized PnL multiplied by leverage
Higher-ranked positions on both sides are matched first.
Execution Price
All ADL executions occur at the bankruptcy price - the exact price where position losses equal margin. This ensures fair treatment for all parties.
Gas Efficiency
Match sizes are limited to:
min(abs(Q_under), abs(Q_opposite))This maintains O(1) complexity per position, ensuring efficient execution.
Key Features
Protocol-Driven
No external intervention required. The system automatically processes matches when ADL conditions are met.
No Additional Penalties
- The underwater account forfeits its margin
- Profitable counterparties adjust positions at bankruptcy price
- No extra penalties beyond the position closure
Outcome
The protocol automatically:
- Updates both accounts' realized PnL
- Reduces maintenance margin requirements
- Restores system health
ADL serves as the final backstop ensuring protocol solvency even in extreme market conditions.