Automatic deleveraging is the emergency brake in crypto perpetuals that removes some of the winning positions when bankruptcy liquidations overwhelm a site’s market depth and remaining buffers, as Ambient Finance founder Doug Colkitt explains in a new X thread.
Perpetual futures contracts – “perps” for commercial shorthand – are cash-settled contracts with no expiration that reflect spot via funding payments, not delivery. Net profits and losses on a shared margin pool rather than shipped coins, which is why, under stress, venues may need to quickly reallocate their exposure to keep the books balanced.
Colkitt views ADL as the final step in a cascade of risks.
Under normal conditions, a busted account is liquidated in the order book close to its bankruptcy price. If the slippage is too significant, the sites rely on the buffers they maintain: insurance funds, programmatic liquidity or safes dedicated to absorbing flows in difficulty.
Colkitt notes that such safes can be lucrative in times of crisis because they buy at deep discounts and resell with strong rebounds; he highlights an hour during Friday’s crypto meltdown when Hyperliquid’s vault booked around $40 million.
The fact, he points out, is that a safe is not magic. He follows the same rules as any participant and has limited risk capacity. When these defenses are exhausted and a deficit remains, the mechanism that preserves solvency is the ADL.
The analogies in Colkitt’s explanation make the logic intuitive.
He compares the process to an overbooked flight: the airline increases incentives to find volunteers, but if no one bites, “someone has to be kicked off the plane.”
In perps, when the bids and buffers do not absorb the loss, the ADL “bangs” a portion of the profitable positions so that the market can leave on time and settle its obligations.
He also reaches the map room.
A player on a good streak can win table after table until the room actually runs out of chips; cutting the winner is not a punishment, it is the house’s way of keeping the game going when the other side cannot pay.
How the queue works
When the ADL triggers, the exchanges apply a rule to decide who will be reduced first.
Colkitt describes a queue that combines three factors: unrealized profit, effective leverage, and position size. This calculation generally puts large, highly profitable, highly leveraged accounts at the front of the line: “the biggest, most profitable whales are sent home first,” as he puts it.
Reductions are assigned at predefined prices linked to the bankrupt side and only continue until the deficit is eliminated. Once the gap is closed, normal trading resumes.
Traders bristle because the ADL can set a correct position when momentum is strongest and outside of the normal execution flow.
Colkitt acknowledges the frustration but says the necessity is structural. Criminal markets are zero-sum. There is no warehouse of real bitcoins or ether behind a contract, only cash claims flowing between long and short positions.
In his words, it’s “just a big boring pile of money.” If a liquidation cannot be settled at or above the bankruptcy price and the buffers are spent, the venue must rebalance instantly to avoid bad debts and cascading bankruptcies.
Colkitt emphasizes that ADLs should be rare, and most of the time they are.
Standard liquidations and buffers usually do the trick, allowing profitable trades to complete on their own terms.
The existence of the ADL, however, is part of the pact that allows sites to offer non-expiring, high-leverage exposure without promising an “infinite stream of losers on the other side.” It’s the last line in the rulebook that prevents the synthetic mirror from cracking under stress.
He also argues that the ADL exposes scaffolding that typically remains hidden.
Criminals construct a convincing simulation of the underlying market, but extreme recordings test the illusion.
The “simulation edge” is the point where the platform must reveal its accounting and forcibly redistribute exposure to maintain parity with the spot and stop a cascade. In practice, this means transparent queuing, published settings, 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 processes, only predictable ones. The reason ADL provokes strong reactions is that it hits winners, not losers, and often at the most visible moment of success. The reason this persists is because it is the only step left when markets refuse to clear and reserves run out.
For now, exchanges are betting that clear rules, visible queues and thicker buffers keep the ADL what it should be — a safety net you rarely see but never ignore.
