Core Insights - Auto-deleveraging (ADL) serves as a mechanism in crypto perpetual futures to manage risk during extreme market conditions, cutting part of winning positions when liquidations exceed market capacity [1][4] - Perpetual futures are cash-settled contracts that rely on funding payments rather than physical delivery, necessitating quick reallocation of exposure to maintain balance during stress [2] - During market turmoil, vaults can be profitable by purchasing distressed assets at deep discounts, as evidenced by a $40 million booking during a recent crypto meltdown [3] Mechanism of Auto-Deleveraging - ADL is the final step in a risk management process, activated when traditional liquidation methods fail to stabilize the market [4] - The process is likened to an overbooked flight, where profitable positions are reduced to ensure market solvency [4] - A card room analogy illustrates that trimming winning positions is essential for maintaining the overall game when liquidity is constrained [5] Queue and Reduction Process - When ADL is triggered, exchanges prioritize which positions to reduce based on unrealized profit, effective leverage, and position size, often affecting large, profitable accounts first [6] - Reductions occur at preset prices linked to the bankrupt side and continue until the market deficit is resolved, after which normal trading resumes [7] - Traders express frustration with ADL as it can impact correct positions during peak market momentum [7]