ADL and Insurance Fund
Loss-absorption sequence for extreme liquidation events
Overview
OBSDN uses a layered solvency model:
- Normal liquidation execution
- Insurance/backstop resources
- Auto-deleveraging (ADL) only when required
Insurance Fund Role
The insurance fund absorbs negative-equity residuals from liquidations that close below the bankruptcy price.
Boundary:
- Covers liquidation shortfalls where execution price is worse than bankruptcy price
- Not sized to guarantee coverage in all extreme market scenarios
ADL Trigger
ADL is considered only if:
- Liquidation + available backstop resources cannot fully absorb losses
- Continuing without ADL would violate platform solvency constraints
ADL Counterparty Selection
When ADL is triggered, opposite-side positions are ranked by a composite priority score. Ranking factors:
- Effective leverage (higher = higher priority)
- Unrealized profit (larger = higher priority)
Positions at the top of the ranking are reduced first.
User Impact
If your position is ADL-selected:
- A portion of your position is force-reduced against the liquidating counterparty
- Execution occurs at the system-determined ADL price
- Realized PnL from the reduction is credited immediately