What is Bybit's automatic deleveraging mechanism (ADL)?

Understanding Bybit's Automatic Deleveraging Mechanism (ADL)

Bybit, a prominent cryptocurrency derivatives exchange, employs an automatic deleveraging mechanism (ADL) to maintain the stability and integrity of its trading ecosystem. This system activates when a leveraged position is liquidated and insufficient insurance funds are available to cover the resulting loss. The ADL ensures that profitable counterparties gradually absorb the losses from undercollateralized positions in a structured manner.

How ADL Functions During Liquidation Events

2. If the market price moves rapidly and the liquidation engine cannot close the position at a sufficient price, the loss is passed to the insurance fund.

3. In cases where the insurance fund is depleted or inadequate, the ADL system engages to prevent systemic risk.

4. The mechanism identifies opposing positions held by traders with high leverage and strong profitability as candidates for deleveraging.

5. These profitable positions are reduced incrementally to offset the deficit created by the unprofitable liquidated trade.

Risk Allocation Based on Profitability and Leverage

2. Traders who hold highly leveraged and significantly profitable short or long positions are prioritized for deleveraging.

3. The more profit a trader has locked in and the higher their leverage, the greater their likelihood of being impacted by ADL.

4. This ranking system ensures fairness by targeting those most capable of absorbing partial position closures without immediate financial distress.

5. Notifications are typically sent to users when their positions approach higher tiers in the ADL queue, allowing them to adjust exposure proactively.

Implications for Traders Using High Leverage

2. Even if a trader maintains adequate margin, their profitable position may be reduced without warning if ADL triggers.

3. Frequent use of maximum leverage settings can place traders near the top of the ADL queue, increasing susceptibility.

4. Monitoring one’s position within the ADL hierarchy through Bybit’s dashboard tools allows for better risk management.

5. Diversifying leverage usage and securing profits periodically can reduce the chances of unexpected deleveraging.

Frequently Asked Questions

What triggers the activation of ADL on Bybit?ADL activates when a liquidated position results in a loss that exceeds the balance of the insurance fund. This commonly occurs during periods of extreme volatility when liquidations happen at unfavorable prices.

Can I avoid being affected by ADL?While it's impossible to fully opt out, reducing leverage, securing profits, and avoiding placement at the top of the ADL queue minimizes the risk. Keeping an eye on your ADL rank helps anticipate potential exposure.

Does ADL affect spot trading positions?No, ADL only applies to derivative contracts such as inverse perpetual, linear perpetual, and futures contracts where leverage is involved. Spot trades are not subject to this mechanism.

How does Bybit notify users about ADL risks?Bybit displays an ADL indicator on the trading interface, showing a user’s current standing in the deleveraging queue. Users nearing higher risk levels receive alerts prompting adjustments to their positions.