Automated de-leveraging (ADL) was at the core of Friday’s crypto bloodbath. What is ADL?

However, on Friday, when people didn’t know about the future change of Trump’s stance, the crypto market went through one of the biggest shakeouts in history. Bitcoin and Ether dropped by 17% and 20% respectively, while XRP lost 60% of its value. Solana saw a 38% drop. Some of the smaller coins neared zero. Reportedly, the Oct. 10 downfall erased $670 billion of the crypto market value. Another outcome for the crypto market was the wave of liquidations of leveraged positions that amounted to $19 billion.

The market crash set several narratives that continue to circulate within the crypto community and in the media. For instance, people discuss sudden de-peg of several assets, spiking fees, and unusual price fluctuations. When the prices reached lows, many exchanges went offline, cutting traders off from the opportunity to buy the dip. Some found it suspicious.

Certain short positions were enormously big and placed too close to Trump’s announcement. Understandingly, it raised speculations over the possibility of insider trading. 

What is ADL?

One of the main contributing factors in massive liquidations of leveraged positions was automated deleveraging. ADL is the last resort measure used by exchanges to preserve solvency at the expense of traders’ profits. 

When an exchange runs out of money amidst one-sided order book overload (not enough long positions to pay off short positions and vice versa), the exchange may start liquidating profitable leveraged positions, as it cannot pay for them. Thus, the exchange adds much-needed liquidity while leaving traders who made the correct bet (short sellers in the Black Friday context) with nothing.

Automated de-leverage is used only if normal liquidations or buffer measures like insurance funds don’t help the exchange to maintain solvency anymore. 

Such extreme situations are possible when long positions get liquidated, but short traders can’t receive money as no new long positions enter the market to provide needed liquidity. In such a case, the exchange may use its insurance fund, spending its own money. However, the fund is not bottomless, and if the problem persists, the exchange may resort to force-closing some of the winning short positions through ADL.

The methodology behind choosing what positions to close may vary depending on the exchange. According to Ambient Finance founder Doug Colkitt, exchanges usually factor in potential profit, leverage size, and the order size. “The biggest, most profitable whales get sent home first,” concludes Colkitt.

ADL in the Friday bloodbath

It’s understood that in the event of a panic sale, not many people open long positions. Given the huge scale of the Oct. 10 sell-off, the situation was amplified to extreme levels. 

However, while the overall mechanism of ADL is not that hard to grasp, the lack of transparency draws criticism from the trading community. For instance, it’s not clear how much money exchanges hold in the buffer funds and at what stage they decide to butcher their users instead of using their own funds.

Automated de-leverage boosted the overall liquidation volume. Yet it is hard to measure its influence in numbers, as the market chaos was caused by a handful of reasons, including exchange outages, oracle bugs, and others. 

Some name Binance as the worst exchange during the Oct. 10 market meltdown. Binance announced compensation airdrops. It’s worth saying that $10 billion of $19 billion was liquidated on Hyperliquid. Hyperliquid founder Jeff Yan took to X to defend his exchange, explaining that ADL was needed to preserve Hyperliquid’s solvency and uptime (both goals were reached). 

Regardless of who contributed to the crypto downfall the most, Oct. 10 revealed several weaknesses of the crypto market at once. Now, the term “automated de-leveraging” will be in many traders’ vocabulary.