Auto Deleverage

As one of the core risk management mechanics, ADL acts as a buffer to backstop profit distribution in an event of volatile price actions to prevent systematic risk to the market. If an asset is highly volatile, the protocol deploys additional measures such as ADL, to de-leverage the position automatically as the time passes if it occurs profits. In this mechanism, the pool which acts as counter-party to all the position in Open Interest forcefully takes over the position and liquidates it with profit to prevent future profit drainage. The priority queue depends on the nature of markets and the direction of trade. The ADL Keepers will consistently check the health of the active positions and deleverage by taking over the position and initiating force closure, which may result in partial liquidation.

Let us define PSP_S, CPC_P as position size and collateral amount in USD and LPL_P, as leverage of the position, then

LP=PSCPL_P = \frac{P_S}{C_P}

Since PSP_S is a constant, hence the relation can be established as

LP1CPL_P \propto \frac{1}{C_P}

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