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Auto-Deleveraging (ADL)

Perp-only risk

ADL is a risk unique to perpetual futures platforms. Options do not have ADL because option buyers pay premium upfront, and option sellers post margin that is managed through standard liquidation. There is no mechanism in options trading where a profitable position is forcibly closed to cover another trader's losses. This is one more reason options are structurally different from perps.

Auto-deleveraging is the last line of defense against platform insolvency. When a liquidated position cannot be fully closed on the order book and the account goes underwater (negative value), ADL forcibly closes profitable positions on the opposite side to cover the loss.

ADL is rare, but understanding it matters because it can close your position without your consent, at a price you did not choose.

How ADL Works​

  1. A trader's position is liquidated but the order book cannot absorb the full size
  2. The liquidated account's value goes negative (bad debt)
  3. The ADL system activates to prevent socialized losses
  4. Profitable traders on the opposite side are ranked by a scoring formula
  5. The highest-ranked positions are forcibly closed at the previous mark price until the bad debt is covered

The Ranking Formula​

ADL index=mark_priceentry_price×notionalaccount_value\text{ADL index} = \frac{\text{mark\_price}}{\text{entry\_price}} \times \frac{\text{notional}}{\text{account\_value}}

This combines two factors:

  • Profitability: mark / entry measures your unrealized gain. Higher profit = higher rank.
  • Leverage: notional / account_value measures how leveraged you are. Higher leverage = higher rank.

The result: highly profitable, highly leveraged positions are ADL'd first.

The ADL system ranks profitable positions by a combined profitability and leverage score. Higher-ranked positions are closed first. Adjust the mark price to see rankings change.
Mark Price (BTC)$105,000
$100k$115k
ADL index = (mark / entry) * (notional / account_value)
1Degen D
+16.7%10.0xADL TARGET
2Trader B
+4.0%8.0xADL TARGET
3Basis H
+11.7%5.0x
4Whale A
+5.5%5.0x
5Retail F
+4.5%2.5x
6Fund C
+1.9%2.0x
7MM E
+1.0%2.0x
8Arb G
+-1.9%1.5x
Red positions are first in line for ADL. Positions with high unrealized profit and high leverage rank highest. A basis trader running 5x leverage with large profits would be near the top of the queue.

Key Properties​

  • Peer-to-peer: ADL transfers the underwater position to a profitable counterparty. No insurance fund is involved at this stage.
  • Mark price execution: ADL fills occur at the previous mark price, not the current order book price.
  • No special treatment: Backstop-liquidated positions have no special priority in the ADL queue.
  • No opt-out: You cannot exempt yourself from ADL.
⚠️
Closed positions are safe

A user with no open positions will never socialize platform losses. ADL only affects accounts with open positions on the profitable side of the underwater trade.

Who Gets ADL'd​

The ranking formula means certain trading styles are more exposed to ADL:

High ADL Risk

First in line

  • Large unrealized profits on leveraged positions
  • Basis traders running 5-10x short perps with big gains
  • Trend followers who pyramided into a winning trade
  • Any position with high notional relative to account equity

Low ADL Risk

Last in line

  • Low-leverage positions (1-2x)
  • Recently opened positions with small unrealized PnL
  • Well-capitalized accounts (low notional/equity ratio)
  • Positions that were partially taken profit on

Reducing your ADL exposure​

  • Take profits periodically: Realized PnL reduces the mark/entry ratio, lowering your ADL rank
  • Use lower leverage: Reduces the notional/account_value component
  • Add margin: Increasing account value with idle collateral lowers your leverage ratio
  • Close and re-enter: Resetting your entry price to current mark removes accumulated unrealized PnL from the formula

ADL and Basis Trades​

ADL is a critical risk for cash-and-carry (basis) traders. These traders hold spot long + perp short to collect funding, and they accumulate large unrealized profits on the short perp side during sustained positive funding periods.

This combination of high leverage (capital efficiency is the whole point) and large unrealized gains (the trade works by accumulating funding over time) puts basis traders near the top of the ADL queue.

The Ethena Example​

Ethena (ENA) runs one of the largest delta-neutral basis strategies in crypto, holding billions in spot + short perp positions across major exchanges. Because their positions are so large and consistently profitable, they would be among the first ADL targets during a liquidation cascade.

To mitigate this, Ethena has negotiated special ADL exemptions with exchanges like Binance. These agreements ensure that Ethena's positions are not forcibly closed during ADL events, protecting the stability of their stablecoin (USDe) backing.

⚠️
No ADL exemptions on Hyperliquid

Unlike centralized exchanges, Hyperliquid does not offer ADL exemptions to any participant. The ADL rules apply equally to every account, regardless of size. This is by design: a permissionless exchange cannot offer backroom deals to preferred counterparties without undermining the fairness guarantees that make on-chain trading trustworthy. If you run a basis trade on Hyperliquid, you are subject to the same ADL queue as everyone else.

Consider a basis trader who is:

  • Long 10 BTC spot at $100,000
  • Short 10 BTC perp at $100,000 (5x leverage, $200k margin)

BTC crashes to $70,000. The short perp is massively profitable (+$300k unrealized). Meanwhile, a large long gets liquidated and the engine cannot fill the liquidation on the book.

ADL activates. The basis trader's short perp is near the top of the queue (high profit + high leverage). ADL closes 5 BTC of the short at $70,000.

Now the trader holds:

  • Long 10 BTC spot (down $150k)
  • Short only 5 BTC perp (up $150k on remaining)

The hedge is broken. The trader is now net long 5 BTC in a crashing market. Any further decline is unhedged loss.

ADL on Hyperliquid​

Hyperliquid's ADL implementation follows the standard model:

  • Trigger: Account value or isolated position value goes negative after liquidation
  • Ranking: (mark_price / entry_price) * (notional / account_value)
  • Execution: At the previous mark price
  • Scope: Only affects positions on the opposite side of the underwater account

HIP-3 Markets​

Builder-deployed perp markets (HIP-3) are also subject to ADL. For monitoring ADL risk on HIP-3 markets, Hydromancers provides a dedicated dashboard:

ADL Dashboard (adldash.xyz) - Real-time ADL risk monitoring for HIP-3 perpetual markets.

See Also​