How ADL Works on Crypto Perp Platforms and Why It Can Cut Winning Trades

Auto-deleveraging (ADL) is an emergency mechanism in crypto perpetual trading that mitigates losses during severe market downturns. When liquidations overwhelm market depth and existing buffers, ADL engages as a last-resort measure to maintain market solvency. It prioritizes cutting portions of winning positions based on unrealized profits, effective leverage, and position size, often impacting larger, more profitable accounts first. This process is crucial as it allows trading venues to manage their risk exposure and prevent cascading failures, keeping the market operational. Analogies likening ADL to overbooked flights or casino chip management illustrate its function: it reallocates risk to ensure market stability. Colkitt, the founder of Ambient Finance, emphasizes that while ADL can upset traders—especially those whose profitable positions are unexpectedly clipped—its presence is integral to the overall risk management framework of perp markets, which rely on maintaining balance amid volatility.

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