BeaconAuto-Deleveraging Defined
Auto-deleveraging (ADL) is a risk management mechanism that futures exchanges use as a last resort to handle positions that cannot be liquidated normally. When a trader's position is liquidated but the liquidation order cannot be filled at a price that covers the losses, the exchange must find another way to close the bankrupt position. ADL does this by automatically reducing the positions of opposing traders - specifically, the most profitable and most leveraged traders on the other side.
Think of ADL as the emergency brake of the exchange. In normal market conditions, liquidated positions are absorbed by other traders or the insurance fund. But during extreme events - flash crashes, sudden market gaps, or liquidity crises - there may not be enough buyers or sellers to absorb the liquidated position. ADL ensures the system remains solvent by distributing the loss to traders who can absorb it.
When Does ADL Happen?
ADL is triggered by a specific chain of events. First, a trader's position hits the maintenance margin threshold and is flagged for liquidation. The exchange's liquidation engine attempts to close this position by placing orders in the market. If the market cannot absorb the liquidation order - perhaps because the price is moving too fast or liquidity has dried up - the position becomes "bankrupt" (the losses exceed the remaining margin).
Next, the exchange's insurance fund steps in to cover the deficit. The insurance fund is a reserve built from liquidation fees and other sources specifically for this purpose. If the insurance fund has sufficient balance, it absorbs the loss and no ADL occurs.
ADL only activates when the insurance fund cannot cover the deficit. At that point, the exchange has no choice but to close positions of opposing traders to balance the books. This is a rare event on well-capitalized exchanges but it can and does happen during extreme market dislocations.
How ADL Affects Profitable Traders
The most counterintuitive aspect of ADL is that it targets profitable traders. If you have a highly profitable long position and a leveraged short trader gets liquidated without enough market absorption, your long position may be partially or fully closed through ADL - even though your trade was performing perfectly.
When ADL closes your position, it does so at the bankruptcy price of the liquidated counterparty. You keep all profits realized up to that point, but you lose the position itself. If the market continues to move in your favor after the ADL event, you miss those additional gains. You are free to re-enter the position, but the disruption and potential price difference can be costly.
The rationale for targeting profitable traders is fairness: they have already benefited from the market move that caused the liquidation on the other side. They are also the most capable of absorbing the position closure because their PnL provides a buffer. However, many traders view ADL as an unwelcome surprise, which is why understanding the mechanism and managing your ADL risk is important.
ADL Priority Ranking
Not all traders face equal ADL risk. Exchanges rank traders in a priority queue based on two factors: unrealized profit percentage and effective leverage. The ranking formula typically multiplies these two values to produce a single priority score. Traders with the highest scores are deleveraged first.
This means a trader with 50x leverage and 200% unrealized profit is at much higher ADL risk than a trader with 3x leverage and 5% unrealized profit. The system is designed to target the positions that have benefited most from the move and are using the most leverage - in other words, the positions that pose the greatest systemic risk.
Many exchanges display an ADL indicator that shows your position in the queue - often as colored lights or bars. When all indicators are lit, your position is at the highest priority for ADL. Monitoring this indicator during volatile periods can give you advance warning to reduce your exposure.
How to Check and Reduce ADL Risk on Hyperliquid
Use lower leverage: Since ADL priority is partly based on effective leverage, reducing your leverage directly lowers your ranking in the ADL queue. A position with 5x leverage is far less likely to be targeted than the same position at 50x leverage.
Take partial profits: Regularly realizing profits reduces your unrealized profit percentage - the other key factor in ADL ranking. If your position has a large unrealized gain, consider closing a portion to lock in profits and reduce your ADL exposure simultaneously.
Monitor during volatility: ADL events are most likely during extreme market moves. If you see cascading liquidations or unusual volatility, consider reducing your position size or lowering your leverage proactively. The insurance fund provides a buffer, but extreme events can deplete it rapidly.
Diversify across assets: ADL is triggered per-market. Having your exposure spread across multiple assets reduces the chance that a single market's ADL event significantly impacts your portfolio. If all your capital is concentrated in one highly leveraged position, a single ADL event can close your entire exposure.