Before we start to introduce our auto-deleveraging (ADL) system, we bring in a new concept: contract loss coverage. If, due to violent price fluctuations or other reasons, a large position or a large number of positions are taken over by the liquidation engine but cannot be fully liquidated immediately, loss will occur and this needs to be covered. ADL system is designed to minimize the negative impacts incurred.
Traditional futures contracts socialize loss. The loss caused by such liquidations will be shared by all traders making profits from that contract in proportion to each trader’s profit rate. This method will influence all traders making profits in a negative way. It also means that traders’ PNL will have to be locked until settlement date.
ADL system works in a different way. The system will rank all traders according to each trader’s profit rate and the leverage used. Long position holders and short position holders are ranked separately. Should contract loss occurs, those who rank highest in the opposing list will have a portion of their position liquidated at bankruptcy price to ensure the liquidation is completed. In other words, part of their positions will be deleveraged automatically.
Advantages of ADL System:
1. As a trader, you can get an idea of your rank in the ADL sequence list by observing the number of lit lights in Binance JEX’s Futures page - All Positions column. If all five lights are lit, you are among the highest ranking traders. This means that part of your position may be automatically deleveraged if a large opposing position or a large number of opposing positions are liquidated and contract loss occurs. You can prevent your position from being partially liquidated by lowering the leverage used. Unlike loss socializing, ADL system gives traders a choice not to be impacted.
2. ADL system is more friendly for low-risk investors as these investors tend to rank in the bottom because of low leverage and low profit rates. In addition, realized PNL can be transferred and used instantly. This makes asset utilization efficiency much higher.
If a liquidated order is closed at a price better than bankruptcy price, the remaining balance will be added to Binance JEX’s insurance fund. If insurance fund is not able to cover the loss of a liquidation, ADL will be triggered. That is to say, the more insurance fund the platform holds, the less likely traders’ positions are to be liquidated. In order words, insurance fund can reduce the occurrence of auto-deleveraging.
If a trader’s position is auto-delveraged, all his/her unfilled orders will be canceled. He/she can place new orders at any time.
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