Auto-Deleveraging (ADL)

ADL is the final solvency mechanism. If a position becomes bankrupt, the system will deleverage a profitable, opposing position from another trader, ranked by profitability and leverage. ADL never affects a user's idle capital; it only applies to open, profitable positions.

Nunchi's markets are built on Hyperliquid's powerful HIP-3 framework and, as such, are protected by the same core solvency mechanisms, including Auto-Deleveraging (ADL).

What is ADL?

Auto-Deleveraging is the final safety mechanism that guarantees the solvency of the trading platform. Its sole purpose is to resolve bankrupt positions—accounts whose value has fallen below zero—without creating socialized losses or bad debt for the system.

ADL is a rare event, only triggered as a last resort when a position cannot be liquidated in the open market and the insurance fund is insufficient to cover the loss.

How Does ADL Work?

When ADL is triggered for a bankrupt position, the system automatically deleverages an opposing profitable position from another trader. Here is the process:

1. Identifying Counterparties: The system targets traders who hold profitable positions on the opposite side of the bankrupt account. For example, if a bankrupt position is a long, ADL will select from traders who are in profit on a short position.

2. Ranking by Profit and Leverage: Profitable traders are not chosen randomly. They are ranked based on a combination of their profitability and the amount of leverage they are using. The system prioritizes deleveraging the traders with the highest profit margins relative to their collateral. This ensures that the most successful and highly-leveraged traders are the first to be selected.

3. Position Closing: The position of the highest-ranked profitable trader is then deleveraged (partially or fully closed) at the price of the bankruptcy event. The bankrupt user's position is effectively transferred to the profitable trader to close out the bad debt, making the platform whole.

A Critical Safeguard for Funds

It is crucial to understand that ADL only affects traders with open, profitable positions.

A user's idle capital held in their account is never at risk of being used to cover another trader's losses. If a user have no open positions, they cannot be selected for ADL. This is a fundamental guarantee that prevents the socialization of losses and protects all users' un-invested capital on the platform.