ADL Defense Mechanism in the Crypto Market: What Traders Need to Know
Date: 2025-10-20 Author: Henry Casey Categories: BUSINESS
On October 10, 2025, the crypto market experienced a record-breaking day of mass liquidations: over $19 billion worth of positions were forcibly closed in 24 hours, $16.7 billion of which were long positions. High volatility in Bitcoin and other cryptocurrencies, as well as a large number of open leveraged positions, led to this dramatic event. Experts such as Lucas Keeley of Future Digital Capital Management note that such sell-offs serve as a warning to traders about the risks of high leverage and margin trading. Despite the dangers, interest in such instruments is only growing, and centralized exchanges are actively developing futures contracts, which account for up to 70% of their revenue, according to Gleb Kostarev, former vice president of Binance and co-founder of Blum.
To protect against losses, exchanges use several tools: insurance funds and the ADL (Auto-Deleveraging) mechanism. ADL is an automatic deleveraging system that is activated in exceptional cases during mass liquidations. The mechanism works by partially closing traders' profitable positions to cover the losses of other users. The main reason for using ADL is the lack of liquidity in the order book and the limited resources of the insurance fund during sharp market fluctuations.
To minimize the risk of ADL, crypto exchanges implement special indicators. For example, Bybit displays a user's ADL rating using a five-level scale of red bars: the more red bars, the higher the probability of closing a profitable position. Traders can also independently reduce their positions to reduce the risk of automatic deleveraging.
Under normal conditions, liquidations occur using standard exchange mechanisms: the insurance fund and funding rates, which maintain a balance between longs and shorts. Gleb Kostarev emphasizes that ADL is used extremely rarely and serves as a system-wide protection, not a profit-making tool for the exchange. The example of Hyperliquid demonstrates that even with significant liquidations, the ADL mechanism can benefit both the exchange and its users by guaranteeing loss coverage.
Many traders don't fully understand how ADL works, which causes an emotional reaction when closing profitable positions. Kostarev compares the exchange's operation to a regular market: the platform merely facilitates trading and settlements without becoming a party to the transaction. Without ADL, the exchange would have to cover losses from its own funds, which increases systemic risk and potentially threatens the security of all user funds.
Therefore, autodeleveraging remains a rare but important tool for crypto exchanges to protect against large losses. Its use is not fraudulent or unfair, but rather aims to maintain market stability during periods of high volatility and mass liquidations, balancing the interests of the exchange and traders.
