What is Auto Deleveraging and How Does It Work?

Contract loss mechanism: The BitOrb Perpetual Contracts employ an Auto Deleveraging (ADL) system as a contract loss mechanism to protect traders from being affected by large losses caused by risky traders.

ADL is designated to cover the contract loss that cannot be covered by Insurance Fund. Traders with the highest profit and effective leverage use will be the highest-ranking and selected to deleverage first. The opposing order of selected trader will be deleveraged at the bankruptcy price of a liquidated position. Maker rebate will be paid to the selected trader and taker fee will be charged to the liquidated position.

For example, Fred has a long position of 10,000 contracts with Liquidation price at US$7,300 while Bankruptcy Price at US$7,150. When the Mark Price hits the Liquidation Price, his position will get liquidated. Assume that there is insufficient balance in Insurance Fund to cover the Contract Loss, it triggered the ADL mechanism.

Trader

The quantity of selling contracts

Ranking

Percentile

Trader A

7,500

5

20%

Trader B

6,500

4

40%

Trader C

5,500

3

60%

Trader D

4,500

2

80%

Trader E

3,500

1

100%

From the table above, we can see that Trader A has the highest ADL ranking. Trader A and B will be selected to cover 10,000 contracts. ADL mechanism kicked Trader A out from ADL ranking since his position had been filled (all 7,500 contracts closed by ADL Mechanism). A further 2,500 contracts of the next ranked trader (Trader B) will be closed, while the remaining 4,000 contracts of Trader B will stay open.

The Insurance Fund is used to prevent ADL. If it is depleted for a given contract, ADL will occur.

If you are deleveraged, you will be sent a notification. Open orders will be canceled and you are free to re-enter.

Priority Ranking Calculation

Deleveraging priority is calculated by profit and leverage. More profitable and higher leveraged traders are deleveraged first.

The ranking calculation is as follows:

Ranking = PNL Percentage * Effective Leverage (if PNL percentage > 0)

               = PNL Percentage / Effective Leverage (if PNL percentage < 0)

where

  Effective Leverage = abs(Mark Value) / (Mark Value – Bankrupt Value)

  PNL percentage = (Mark Value – Avg Entry Value) / abs(Avg Entry Value)

  Mark Value = Position Value at Mark Price

  Bankrupt Value = Position Value at Bankruptcy Price

  Avg Entry Value = Position Value at Average Entry Price

The system splits these positions by longs and shorts and ranks the positions from highest to lowest.

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