What is ADL (Auto-Deleveraging) on Bybit and how to avoid it?

Understanding Auto-Deleveraging (ADL) on Bybit

1. Auto-Deleveraging, commonly referred to as ADL, is a risk management mechanism employed by Bybit in its derivatives trading platform. When a trader's position is liquidated due to insufficient margin, the exchange must close that position. However, if there isn’t enough counterparty liquidity to absorb the liquidation at a fair price, Bybit activates ADL to prevent systemic losses to the insurance fund.

2. During an ADL event, profitable counterparties with high leverage positions are automatically selected to reduce their exposure. This process offsets the losing position without relying solely on market orders. The selection is based on a tiered system where traders using higher leverage and holding larger positions are more likely to be impacted.

3. The mechanism ensures the solvency of the platform during extreme market volatility. Without ADL, large-scale liquidations could drain the insurance fund, potentially leading to socialized losses or auto-deleveraging across all users. Bybit’s implementation prioritizes fairness by targeting only those whose positions contribute most to imbalance.

4. Each contract has an ADL ranking indicator visible on the user interface. This ranking reflects the likelihood of being deleveraged. A lower number means higher risk. Traders can monitor this in real time to adjust their strategies accordingly.

5. Unlike forced liquidation, which affects only the undercollateralized trader, ADL impacts solvent traders on the opposite side of the market. While rare, it introduces an indirect risk for highly leveraged long or short holders during flash crashes or rapid price movements.

How ADL Impacts Traders

1. When a user’s position is reduced through ADL, it happens partially or fully depending on how much offset is needed. There is no prior warning once the trigger conditions are met, making it crucial to understand exposure beforehand.

2. Affected traders may lose part of their unrealized profits instantly, especially if they are on the winning side of a heavily imbalanced market. This creates a paradox where successful speculation can still result in involuntary position reduction.

3. The frequency of ADL events increases during periods of low liquidity and high volatility, such as major news releases or black swan events. Markets like Bitcoin perpetual contracts see these occurrences more often than altcoin pairs due to larger position sizes.

4. Partial closures from ADL do not generate direct fees, but they disrupt trading strategies reliant on precise exit timing. Scalpers and arbitrageurs are particularly vulnerable since their models assume full control over position lifecycle.

5. Although Bybit compensates the insurance fund before resorting to ADL, repeated use indicates strain on the system. Frequent activation suggests underlying issues in market depth or excessive speculative behavior within the ecosystem.

Strategies to Minimize ADL Risk

1. Reducing leverage significantly lowers the chance of being selected in an ADL sequence. Positions using 5x leverage or below typically appear near the bottom of the ADL queue, offering greater protection during cascading liquidations.

2. Monitoring the ADL level displayed on the trading interface allows proactive adjustments. If your rank climbs into dangerous territory, consider closing part of the position or adjusting entry points to safer zones.

3. Opting for isolated margin mode helps contain exposure. In cross-margin mode, available balance across the entire account influences liquidation thresholds, increasing unpredictability. Isolated settings provide clearer boundaries for risk assessment.

4. Avoid entering trades immediately after large price swings. These moments often precede clusters of liquidations, raising the probability of ADL activation. Waiting for stabilization improves execution quality and reduces indirect risks.

5. Diversifying across multiple contracts or exchanges spreads ADL exposure. Concentrating capital in one derivative instrument amplifies vulnerability when that specific market undergoes stress-induced deleveraging.

Frequently Asked Questions

What triggers ADL on Bybit?ADL is triggered when a leveraged position gets liquidated and there are insufficient opposing orders in the order book to fill it at a reasonable price. To prevent loss absorption by the insurance fund, Bybit begins closing profitable positions on the other side, starting with those most leveraged.

Can I get notified before ADL occurs?Bybit does not send real-time alerts for impending ADL. Users must manually check the ADL ranking next to their open positions. A rising rank indicates increased susceptibility, requiring self-monitoring to respond proactively.

Does ADL affect spot trading?No, ADL only applies to derivative products such as futures and perpetual contracts. Spot trades involve actual asset ownership and do not carry leverage-related risks that necessitate deleveraging mechanisms.

Is ADL unique to Bybit?While the term 'ADL' is specific to Bybit, similar mechanisms exist on other derivatives platforms under different names. For example, some exchanges implement 'clawbacks' or automatic position reductions during extreme conditions to maintain financial integrity.