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ADL (auto-deleveraging) is a last‑resort solvency mechanism. It only occurs in extreme conditions, when losses from liquidations would otherwise consume too much of the market’s budget.

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When ADL is used

Normally, if a liquidated position ends underwater, the Insurance Fund covers the deficit so the system can settle and move on. ADL is used when the protocol determines that the insurance fund budget for a market is at (or beyond) its risk limit for a specific close‑out.

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Triggering

The protocol periodically scans positions that are severely at risk. Those whose margin ratio has fallen well below the liquidation level are candidates for ADL. The protocol then computes two values:
  1. Current deficit: the insurance fund dollars needed to settle these positions at the current price.
  2. Shock deficit: the insurance fund dollars needed if the price were to move an additional small percentage against these positions.
These are compared against the market’s insurance fund budget (a fraction of the total insurance fund allocated to that market):
  • Shock deficit ≤ budget: No ADL action. The insurance fund can absorb even a short-term adverse price move, so normal liquidation handles it.
  • Current deficit ≤ budget, but shock deficit > budget: ADL triggers at the current price. The insurance fund can cover current losses, but a further price move could exceed the budget so ADL acts preemptively.
  • Current deficit > budget: ADL triggers at a computed close‑out price chosen so the market’s insurance fund allotment can exactly cover the settlement.
    • In this extreme case, the protocol may halt trading for the market.

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What happens when ADL triggers

When ADL triggers, the protocol acts on one side of the market at a time (e.g. all at-risk longs, or all at-risk shorts):
  1. Closes at-risk positions on the losing side. This includes every position whose margin ratio is below the ADL threshold, even if it still has some margin left. Remaining margin on these positions is not returned.
  2. Applies a pro‑rata reduction to all positions on the opposite side to offset the imbalance, whether or not each position is individually profitable.

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How ADL is applied to opposite-side positions

If you’re on the opposite side, your position is reduced by the same percentage as everyone else on that side.
For example, if the positions being closed total 5% of the open size on the opposite side, then every position on that side is reduced by about 5%. Each reduction is rounded to a valid order size, so an individual position may be reduced slightly more or less.

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What you’ll see

  • Your position size decreases (only if you are on the opposite side of the at-risk positions included in the ADL close‑out).
  • The reduction happens at the (or the computed close‑out price in the extreme case).

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Relationship to liquidation

  • Liquidation closes positions that are below . See Liquidation.
  • The insurance fund covers deficits from underwater liquidations until the market reaches its risk limit. See Insurance Fund.
  • ADL is what happens when that limit is reached, or when a small further price move would push losses past it: it reduces positions on the opposite side to offset the loss and keep the protocol solvent for the market.
Last modified on October 19, 2026