The last line of defense for the exchange: Why does the automatic reduce position (ADL) mechanism force me out when I'm making a profit?

On the 11th, during the flash crash of the crypto market, many traders faced forced liquidation of their automatic Close Position (ADL) and were very unhappy. Doug Colkitt, the founder of Ambient Finance, posted about this, systematically explaining the principles, operational logic, and significance of ADL, which can be said to be an indispensable safety mechanism in the operation of the Perptual Futures market.

The perpetual futures market does not have “real tokens”.

Doug first clarifies that the Perptual Futures (perpetual futures) market does not hold any real assets. Taking the BTC Perptual Futures ( like BTC-USDT) as an example, there is no actual Bitcoin in the market, only a large “cash pool” composed of traders' margins.

Perptual Futures product structure

The core rule of the entire system is that “longs and shorts must be perfectly balanced.” Therefore, when prices fluctuate, some people make profits while others incur losses, and cash is continuously redistributed within this pool.

The market liquidity is severely lacking, and ADL becomes the last line of defense.

When the market is highly volatile, the exchange will first sell the positions that are subject to Forced Liquidation through the normal liquidation mechanism. However, if all the liquidatable positions have been settled and market liquidity is still insufficient, the insurance fund (vault) will intervene to absorb the risk, which is also a common second line of defense used by the exchange to maintain stability.

The official treasury of Hyperliquid HLP

But if even the insurance fund cannot bear it, the “Auto-Deleveraging (ADL, Auto-Deleveraging)” mechanism will be triggered, which is the last line of risk control.

(Hyperliquid HLP adjusted the leverage limits for BTC and ETH after damage, emphasizing the market competitiveness of data transparency)

Perfect analogy: Flight seats are overbooked, someone has to disembark.

Doug compared ADL to the situation of overbooked flight tickets, where the airline would first continue to increase compensation incentives to find passengers willing to change flights, but if no one is willing, they still have to forcibly remove someone from the plane. The logic of ADL is similar:

If the bullish funds are insufficient and there is no one willing to step in, the system has no choice but to let at least some of the bearish positions exit and close positions. As for the selection and pricing process of the positions to be closed, each exchange has its own approach.

(The liquidation data from Binance is ridiculously low! Hyperliquid's public liquidation data challenges Binance? )

How ADL works: Who will be subject to Forced Liquidation?

Doug explained that the ADL system determines who will be forced to Close Position first based on profit levels, leverage multiples, and position sizes. You can refer to the automatic liquidation warning lights on contract positions in various exchanges.

Bybit's ADL signal The truth of the zero-sum market: ADL is a necessary measure to maintain order.

Doug candidly stated that the perpetual market is essentially a zero-sum game, with no new value being created and no real BTC being bought or sold.

He described it as: “Just like thermodynamics, energy ( capital ) does not disappear, it only transfers between long and short.”

ADL is a last resort that is unavoidable; it is the ultimate mechanism that ensures this closed Perptual Futures system does not collapse under extreme circumstances.

This article The Exchange's Last Line of Defense: Why the Automatic Reduction of Positions ADL Mechanism Forces Me to Exit When Profiting? First appeared in Chain News ABMedia.