Automatic deleveraging is the emergency brake on perpetual cryptocurrencies that cuts off part of winning positions when bankrupt liquidations overwhelm a venue’s remaining market depth and buffers, as Ambient Finance founder Doug Colkitt explains in a new X thread.
Perpetual futures (“delinquent” in business shorthand) are cash-settled contracts with no expiration that mirror cash through financing payments, not delivery. Profits and losses are netted against a shared margin pool rather than the currencies posted, so in stressed situations, venues may need to reallocate exposure quickly to keep the books balanced.
Colkitt frames ADLs as the last step in a cascade of risks.
Under normal conditions, an inflated account is liquidated in the order book close to its bankruptcy price. If the slippage is too severe, venues lean on whatever cushion they maintain: insurance funds, programmatic liquidity, or dedicated vaults to absorb the distressed flow.
Colkitt notes that such vaults can be lucrative during times of turmoil because they buy at deep discounts and sell at sharp rebounds; points to a time during Friday’s cryptocurrency crisis when the Hyperliquid vault reserved around $40 million.
The point, he stresses, is that a vault is not magic. It follows the same rules as any participant and has finite risk capacity. When these defenses are exhausted and a deficit still persists, the mechanism that preserves solvency is the ADL.
The analogies in Colkitt’s explainer make the logic intuitive.
He compares the process to an overbooked flight: The airline offers incentives to find volunteers, but if no one bites, “someone has to be kicked off the plane.”
In the case of criminals, when bids and reserves do not absorb the loss, ADL “bounces” part of the profitable positions so that the market can exit in time and settle the obligations.
It also reaches the card room.
A player with a good streak can win table after table until the room runs out of chips; Cutting the winner is not a punishment, it’s the house’s way of keeping the game going when the other side can’t pay.
How the queue works
When the ADL is activated, exchanges apply a rule to decide who reduces first.
Colkitt describes a tail that combines three factors: unrealized profits, effective leverage, and position size. That math typically pushes the large, highly profitable, highly leveraged accounts to the front of the line: “the biggest, most profitable whales are sent home first,” as he puts it.
The reductions are assigned to pre-established prices linked to the bankruptcy side and continue only until the shortfall is absorbed. Once the gap is closed, normal trading resumes.
Traders are infuriated because ADL can cut a good position at the moment of greatest momentum and outside the normal execution flow.
Colkitt acknowledges the frustration but maintains that the need is structural. Criminal markets are zero-sum. There is no actual bitcoin or ether store behind a contract, just cash claims that move between long and short positions.
In his words, it’s “just a big, boring pile of cash.” If a liquidation cannot be liquidated at or above the bankruptcy price and the cushions are worn out, the place must be instantly rebalanced to avoid bad debts and cascading bankruptcies.
Colkitt emphasizes that ADLs should be rare, and most days they are.
Standard liquidations and buffers usually work, allowing profitable trades to exit on their own terms.
ADL’s existence, however, is part of the pact that allows venues to offer high-leverage, zero-maturity exposure without promising an “infinite stream of losers on the other side.” It’s the last line of the rule book that prevents stain synthetic mirror from cracking under stress.
He also argues that the ADL exposes scaffolding that normally remains hidden.
Criminals construct a convincing simulation of the underlying market, but extreme tapes test the illusion.
The “simulation edge” is when the platform must disclose its accounting and forcibly redistribute exposure to maintain parity with spot and stop a cascade. In practice, that means a transparent queue, published parameters, and, increasingly, on-screen indicators that show accounts where they are in the queue.
Colkitt’s broader message is pragmatic.
No mechanism can guarantee painless unraveling, only predictable ones. The reason the ADL provokes strong reactions is that it hits the winners, not the losers, and often at the most visible moment of success. The reason it persists is that it is the only step left once the markets refuse to settle and reserves are depleted.
For now, exchanges are betting that clear rules, visible queues, and thicker buffers will keep ADL as it should be: a support that is rarely seen but never ignored.
