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Auto-Deleveraging (ADL) is the last line of defense in Intention’s risk system. It only fires in extreme market conditions when all earlier layers — risk warnings, order-book liquidations, and the liquidation vault — have failed to absorb a bad position. When ADL triggers, the protocol forces profitable counterpart positions to close at the bankruptcy price, using their profit to erase the bad debt. This guarantees platform solvency without socializing losses across all users. A critical invariant: users without positions on a contract never absorb ADL losses for that contract. The pain is contained to counterparty exposure.

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When ADL triggers

For a specific contract, ADL activates when any of these conditions holds:
  1. Vault coverage exhausted. The liquidation vault’s realized + unrealized PnL on this contract is at or below its loss-absorption threshold, meaning it cannot take more bad debt safely.
  2. Vault position limit reached. The vault’s notional exposure in this contract is at or above a configured risk ceiling (OI share and/or absolute notional).
  3. Short-term drawdown limit. The vault’s PnL drawdown over a 30-minute rolling window is at or above the configured drawdown threshold.
  4. Manual activation. The vault operator can flip ADL on out-of-band for exceptional conditions.
All thresholds are per-contract configuration, tunable by risk ops.

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When ADL deactivates

Once triggered, ADL remains active until all of the following are true:
  • Vault PnL on the contract (realized + unrealized) is back above a recovery threshold (the trigger threshold times a recovery coefficient)
  • The vault’s contract position is zero
  • The vault’s 30-minute rolling PnL is non-negative
  • The operator confirms deactivation
This hysteresis prevents ADL from flickering on and off around a threshold.

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Ranking algorithm

When ADL triggers, Intention ranks all counterpart profitable positions — longs if the bad position was short, shorts if the bad position was long — by a deterministic score: 
score = (unrealized_pnl_ratio) × (effective_leverage)
where:
  • unrealized_pnl_ratio is (mark_price − entry_price) / entry_price for longs, inverted for shorts
  • effective_leverage is notional_position / account_value (cross) or notional_position / isolated_margin (isolated)
Traders who are simultaneously the most profitable and most highly leveraged rank highest. Those positions are closed first. The ranking is deterministic — given the same state, every validator computes the same ordering. The intuition: the users most exposed to the market (high leverage) who have benefited most (high profit) are the ones best able to absorb the residual loss.

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Execution

Once ranking is set:
  1. Select counterparts. The engine walks the ranked queue from the top, picking profitable positions to close.
  2. Determine quantities. Continue picking until the bad debt is fully covered.
  3. Execute at the bankruptcy price. The selected counterpart positions are closed against the bankrupt trader at that trader’s bankruptcy price.
  4. Settle. The bad trader’s equity is set to zero. The counterpart traders’ profits are reduced by the assumed portion. No external fees or taker costs apply.
The process is atomic — all ADL operations for a given bankruptcy succeed together or roll back together, leaving no inconsistent partial state.

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Risk indicator

Because ADL ranking is computable at any time, traders can see their current ADL risk live in the UI and API. Intention exposes a 1–5 risk level per position, derived from the percentile of the ADL score across all counterpart positions on that contract:
  • Level 1–2. Low risk. You are not near the front of the queue.
  • Level 3. Elevated risk. Worth monitoring.
  • Level 4–5. High or extreme risk. Consider reducing size or leverage.
The indicator refreshes at least every 5 seconds. When your level first crosses from ≤3 to 4 or from ≤4 to 5, you receive a one-shot cross-threshold notification. Same-level notifications are not repeated. Users can mute these. When the data feed is unavailable (oracle or chain data delayed > 3 seconds), the indicator shows “unavailable” rather than a stale number.

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Design goals

  • Transparency. Every rule, threshold, and ranking input is on-chain and documented. Quants can compute exactly their risk.
  • Deterministic, not arbitrary. The ranking is a function of public state — there is no judgment call.
  • No loss socialization. Losses are transferred only to counterparties, never to bystanders.
  • Capital preservation. Users in the winning queue keep the bulk of their gains; ADL only takes enough to cover the specific shortfall.
  • Composable with vaults. ADL protects the liquidation vault from blowouts, which is what gives vault depositors confidence to provide liquidity.