Auto-Deleveraging (ADL) Explained: How Perps Share Losses
Quick answer. Auto-deleveraging (ADL) is a perp venue's last resort when a bankrupt position's losses exceed what liquidations and the insurance fund can cover. The venue closes profitable opposing positions, usually ranked by profit and leverage.
Video transcript
Auto-deleveraging can close a winning trade you never chose to close. It is a perp venue's last resort when losses outrun liquidations and the insurance fund.
On October 10, 2025, Hyperliquid's ADL closed about 2.1 billion dollars of positions in 12 minutes, according to Gauntlet CEO Tarun Chitra.
Most venues use a waterfall. Market liquidation comes first. Then a backstop takes the position over. Only then does ADL close profitable opposing positions.
Rankings differ by venue. Binance uses profit times leverage. Hyperliquid and Lighter weigh leverage and unrealized profit. On GMX V2, keepers choose the order.
Under a profit times leverage queue, the biggest, most leveraged winner goes first. Lower leverage moves you back in the line.
Chitra estimates the October queue overshot, costing winners 45 to 51.7 million dollars more than the shortfall required. Hyperliquid's Jeff Yan rejected an earlier version of that critique.
Guardian's audits have found a stuck sequence that could freeze liquidations, and a haircut users could front-run. Keeper discretion and below-market closing prices add design risk.
Protocols should publish the ranking rule, alert when the backstop runs low, test mid-sequence price recovery, and build an abort path that needs no upgrade.
Guardian puts two competing teams on the same code, with invariant fuzzing beneath both. Read the full article, or test your ADL before a cascade does.
Auto-deleveraging gets searched after every cascade. On October 10, 2025, Hyperliquid's ADL closed about $2.1 billion of positions in 12 minutes, according to a paper by Gauntlet CEO Tarun Chitra.
For a trader, ADL can close a winning position you never chose to close. For a venue, it is code that runs only in the worst minutes.
This guide covers when ADL triggers, how venues rank positions, and where ADL logic fails. For the day itself, read what happened on October 10.
What ADL Is
Every perp long is matched by a short. If a losing account goes negative, someone has to cover the gap, or the venue carries bad debt.
Most venues work through a waterfall:
- Market liquidation. The engine closes the position on the order book.
- Backstop. An insurance fund or liquidator vault takes the position over.
- ADL. The venue closes profitable positions on the other side.
Binance's docs say ADL "occurs only if the Futures Insurance Funds are unable to accept a bankrupt futures position."
Hyperliquid calls ADL the final safeguard, "ensuring that the platform has no bad debt." Its docs add that a user with no open positions never absorbs platform losses.
ADL is not the only way to share a loss. Chitra's paper says Drift and Paradex use a pro-rata mechanism instead of a queue.
When ADL Triggers
The trigger depends on who takes the other side of trades.
Order book venues
- Hyperliquid: orders go to the book, then to a liquidator vault inside HLP. ADL starts once an account turns negative.
- Lighter: its LLP insurance fund takes positions over while it stays above initial margin. The rest are auto-deleveraged.
- Binance: ADL runs when the insurance fund cannot accept a bankrupt position.
Binance notes that coin-margined contracts are more exposed, because contracts sharing one collateral asset share one smaller insurance fund.
Pool-based venues
On GMX V2, traders' profits are paid from a liquidity pool. ADL protects the pool, not a bankrupt counterparty.
When pending trader profit grows too large against pool value, past a configured limit, ADL keepers can reduce profitable positions.
The contracts stop them from cutting too far: an ADL that pushes the ratio below a set minimum reverts.
The code's own example is a DOGE market backed by ETH, where DOGE rises faster than ETH.
What sets it off
ADL fires when prices gap faster than liquidations can fill, books are thin, and many accounts fail together. A small backstop makes ADL likelier in each case.
How Positions Are Ranked
Most venues queue profitable positions by profit and leverage. Chitra's paper says BitMEX introduced the profit-times-leverage model in 2016 and Binance adopted it in 2019.
He writes that venues using it carry "well over 95% of perpetuals trading volume."
| Venue | Type | Ranking | Closing price |
|---|---|---|---|
| Binance | CEX | Profit % × effective leverage | The liquidated order's bankruptcy price |
| Hyperliquid | Onchain order book | (Mark ÷ entry) × (notional ÷ account value) | The previous mark price |
| Lighter | Onchain order book | Leverage and unrealized PnL | No worse than the position's zero price |
| GMX V2 | Pool | Keeper's choice; order not enforced onchain | Market decrease with no slippage limit |
Under a profit-times-leverage queue, the most profitable, most leveraged winner goes first. A low-leverage winner sits near the back.
The closing price matters too. Binance warns the bankruptcy price "may be out of the contract's market price range." It charges no trading fee on positions closed by ADL.
Hyperliquid's HIP-3 docs say builder-deployed markets also fall back to ADL. TradeXYZ documents the same sorting index for its stock perps.
ADL in Practice
Hyperliquid, October 10, 2025
Chitra's paper argues the queue overshot. His February 2026 revision estimates winners lost $45.0 million to $51.7 million more than the shortfall required.
Hyperliquid's Jeff Yan rejected an earlier version of the critique, Protos reported. He said the queue ranks by both leverage and unrealized PnL.
SK Hynix on TradeXYZ, July 28, 2026
One Seoul pre-market print sent TradeXYZ's SK Hynix perp sharply lower. A system backstop address absorbed 406 long positions before it was liquidated itself, Galaxy Research reported.
Profitable shorts were auto-deleveraged, per Galaxy. Our equity perps explainer covers how one print got through.
Where ADL Logic Fails
Chitra's paper argues no ADL policy can satisfy solvency, revenue and fairness to traders at once. Every design trades one against the others.
Audits find narrower failures. Two from Guardian's public reports:
- Stuck sequences. A liquidator whose equity recovered mid-ADL could freeze every liquidation on the venue (Ethereal, Low).
- Front-running the haircut. Where losses are shared as a withdrawal haircut, users who saw bad debt coming could exit first (Perp City, Medium).
In the Ethereal case, each ADL batch re-checked that the liquidator was bankrupt. If its equity turned positive mid-sequence, every remaining batch would revert, with no reset path.
The report notes the venue's current engine cannot reach that state, hence the Low rating.
Other risks come from the design itself:
- Keeper discretion. GMX's contracts do not check that ADL follows profit or size order.
- Value extraction. GMX's README warns keepers could extract value through ADL execution.
- Price choice. Closing at a prior mark or a bankruptcy price can pay winners less than the market.
- Overshoot. A queue can close more than the shortfall, as Chitra estimates for October 10.
Our perp DEX audit checklist lists more ADL checks, each tied to a finding.
What to Monitor
Traders
- Your ADL indicator or queue rank, where the venue shows one.
- Leverage on winning positions: lower leverage moves you back in the queue.
- The insurance fund or backstop vault against open interest.
- How the venue's ADL behaved in past cascades.
On Hyperliquid, also know how the HLP vault and validators back the exchange. Our Hyperliquid risk breakdown maps them.
Protocols
- Publish the ranking rule, the closing price and each account's queue position.
- Alert when the backstop falls below a set share of open interest.
- Test ADL with partial batches, mid-sequence price recovery and repeated rounds.
- Apply socialized losses once bad debt is certain, not once it is booked.
- Give a stuck ADL sequence an abort path that needs no upgrade.
- Log each ADL against the shortfall it covered, so overshoot can be measured.
How Guardian Reviews ADL
Guardian's audits for onchain teams put two competing teams on the same code, with invariant fuzzing beneath both. The findings above came from that work on perp venues.
Keepers that execute ADL need their own review. Guardian's offchain automation pentest covers what each automated key can call and whether a stuck job halts safely.
Frequently Asked Questions
What does ADL mean in crypto?
Auto-deleveraging. When a bankrupt position's losses exceed what liquidations and the insurance fund can cover, the exchange closes profitable positions on the opposite side to absorb them, so the venue avoids bad debt.
Why was my profitable position closed by ADL?
A trader opposite you went bankrupt, and the backstop could not absorb the loss. Your position ranked high in the queue: on most venues, high profit and high leverage. Binance closes it at the bankruptcy price, with no fee.
How can I reduce my ADL risk?
Lower leverage on winning positions, take partial profits in fast markets and watch the venue's ADL indicator. Check the insurance fund or backstop vault before sizing up. Binance's docs say ADL cannot be avoided entirely.
Is ADL the same as liquidation?
No. Liquidation closes a losing position that fell below its maintenance margin. ADL closes a winning position to cover a bankrupt one that liquidation and the backstop could not absorb.
Sources
- Hyperliquid Docs: Auto-deleveraging (accessed November 6, 2026)
- Hyperliquid Docs: Liquidations (accessed November 6, 2026)
- Binance: What Is Auto-Deleveraging (ADL) and How Does It Work? (updated January 13, 2026)
- Lighter Docs: Liquidations and LLP (Insurance Fund) (accessed November 6, 2026)
- GMX: gmx-synthetics AdlUtils.sol (GitHub, read November 6, 2026)
- GMX: gmx-synthetics AdlHandler.sol (GitHub, read November 6, 2026)
- GMX: gmx-synthetics repository README (GitHub)
- Hyperliquid Docs: HIP-3, Builder-Deployed Perpetuals (accessed November 6, 2026)
- trade[XYZ] Docs: Auto-Deleveraging (accessed November 6, 2026)
- arXiv: Tarun Chitra, Autodeleveraging: Impossibilities and Optimization, v3 (February 16, 2026)
- Protos: Outdated algorithm caused $650M excess losses on Hyperliquid, report (December 10, 2025)
- Galaxy Research: How One Share in Seoul Broke Hyperliquid's Largest Equity Market (July 31, 2026)
- Guardian: Ethereal Protocol Review (August 6, 2026)
- Guardian: Perp City Protocol Review (August 7, 2026)
Test your ADL before a cascade does
Guardian reviews liquidation, insurance fund and ADL paths in perp venues, along with the keepers that execute them.