Auto-Deleveraging

Auto-Deleveraging (ADL) is the final deterministic fallback when a liquidation creates bad debt or when its planned position reduction cannot be fully accepted within protocol capacity.

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When ADL Activates

ADL handles two separate conditions:

1. Shortfall: realized liquidation losses exceed the account’s remaining collateral.
2. Underfill: some planned liquidation quantity cannot be accepted within protocol capacity.

These paths are separate. Underfill can activate ADL even when the liquidated account has no collateral shortfall.

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Ranking

Eligible profitable accounts on the required side of the market are ranked using profit and leverage: $$\text{score}_i = \max\left(\text{PnL}_i,\; \epsilon\right)^w \cdot \text{leverage}_i^{1-w}$$ $w$ is the configured profit-versus-leverage weight. Higher-scored accounts receive priority. Accounts without a position in the required direction or without positive PnL receive no allocation.

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Allocation

ADL quantity is distributed pro-rata by score and rounded deterministically in instrument tick space. Allocations are capped by each position’s remaining size, so ADL cannot reverse a position through zero. Very small allocations are concentrated on the highest-ranked eligible accounts rather than creating dust across a large candidate set.

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Execution Price

The execution price depends on why ADL was required:

• Underfill ADL reduces eligible positions at the current mark price.
• Shortfall ADL closes selected profitable positions at their entry price while the corresponding offsetting position reductions are recorded at mark. The realized difference covers the shortfall.

Every ADL event reports its executed price, size, side, and reason.

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Risk Vault

For shortfall, a market-specific configured share may be assigned directly to the protocol risk vault. ADL covers the remaining eligible amount. If candidate capacity is insufficient, the unresolved shortfall is absorbed by the risk vault. For underfill, any quantity that cannot be allocated across eligible accounts returns to protected execution rather than being silently dropped.

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Safety Properties

• Liquidated accounts and protocol-owned accounts are excluded from the ADL candidate set.
• Candidate ordering and rounding are deterministic across validators.
• Allocations cannot cross a position through zero.
• Shortfall and underfill are reported separately.
• Requested, executed, residual quantity, participant count, and average price are summarized for each ADL operation.

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Full Safety Stack

1. Impact-aware margin reserves for expected closeout cost before bad debt develops.
2. Portfolio optimizer selects the reductions that restore margin most efficiently.
3. Protected execution uses available market liquidity within deterministic fair- and oracle-anchored price limits.
4. Risk vault and ADL resolve shortfall or unprocessed quantity.