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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 insurance fund 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 underwater positions on the losing side.
  2. Applies a pro‑rata reduction to all positions on the opposite side to offset the imbalance.

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How ADL is applied to winning positions

If you’re on the profitable side, your position is reduced by the same percentage as everyone else on that side.
For example, if ADL needs to close an amount equal to 5% of the total open size, then every position on the profitable side is reduced by 5%.

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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 oracle price (or the computed close‑out price in the extreme case).

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Relationship to liquidation

  • Liquidation closes positions that are below maintenance margin. See Liquidation.
  • The insurance fund covers deficits from underwater liquidations until the market reaches its risk limit. See Insurance Fund.
  • ADL is what happens after that limit is reached: it reduces positions on the opposite side to offset the loss and keep the protocol solvent for the market.