Auto-Deleveraging (ADL)
Overview
Auto-Deleveraging is a final safeguard mechanism within the Bulk Exchange platform, designed to ensure total system solvency under extreme market conditions. It is a procedure of last resort, triggered only when the standard liquidation process is insufficient to prevent an account's equity from becoming negative.
The primary goal of ADL is to prevent any scenario where the exchange would have to socialize losses, thereby protecting all users from the risk of another trader's bankruptcy.
Trigger for ADL
The ADL process is initiated if, during a liquidation, the market moves so rapidly and adversely that an account's equity becomes negative. This means the trader's collateral has been completely wiped out, and they now owe more than they have in their account, creating "bad debt" for the platform.
The ADL Process
In the rare event that ADL is triggered for a bankrupt account, the system must close the underwater position to resolve the bad debt. To do this, the system will automatically deleverage profitable traders on the opposite side of the market.
Identification: The system identifies traders who hold profitable positions that are opposite to the bankrupt position.
Ranking: These profitable traders are ranked, typically based on a combination of their profitability and the leverage they are using. Those with the highest profits and leverage are prioritized for deleveraging first.
Execution: The positions of the selected profitable traders are automatically closed (deleveraged) at a bankruptcy price against the underwater position. The amount closed is just enough to cover the bad debt.
This process ensures that the bankrupt position is removed from the market and the system's financial integrity is maintained without requiring an insurance fund or socializing losses among all users. While ADL is a necessary backstop, the robust, multi-tiered liquidation system on Bulk Exchange is designed to handle almost all scenarios, making ADL an exceptionally rare event.
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