Crypto Newbie / Simulators / Insurance + ADL
Insurance Fund + Auto-Deleveraging (ADL) Simulator
Every perpetual exchange has a hidden three-layer defence against trader bankruptcies. When a trader gets liquidated faster than the market can absorb, the exchange's insurance fund covers the shortfall. When the fund runs out, ADL (Auto-Deleveraging) kicks in — and PROFITABLE counterparties on the opposite side get force-closed at the bankruptcy price to absorb the loss. This is why your winning trade can get yanked away even though you weren't liquidated. The simulator runs the exact resolution math step by step.
Insurance fund
Bankrupt trader
How far underwater the trader went BEFORE the exchange could force-close. This loss must be absorbed somewhere.
Profitable counterparties (potential ADL victims)
ADL ranking = (P&L / notional) × leverage. Most profitable + most leveraged positions on the OPPOSITE side get clawed back first.
| Name | Side | Notional | Unrealised P&L | Leverage× | ADL rank |
|---|---|---|---|---|---|
| Patient short | 0.80 | ||||
| Whale short | 0.38 | ||||
| Degen short | 7.50 | ||||
| Losing short | — | ||||
| Mid short | 0.50 |
The three layers of bankruptcy resolution
Layer 1: the trader's margin (their own collateral). Layer 2: the insurance fund (built up from liquidation fees during normal times). Layer 3: ADL claws back profit from counterparties. Layer 4 (if all else fails): the exchange absorbs the loss — this is what FTX defaulted on. Each layer protects the next. As a profitable trader, you should care because Layer 3 means YOU can become a victim of someone else's bad trade.
How insurance funds get funded
During normal liquidations, the exchange seizes the position at the bankruptcy price + a small fee on top. That fee goes into the insurance fund. Across thousands of normal liquidations per day, the fund grows by tens of thousands of dollars daily — Binance's perp insurance fund is over $300M. The fund SHRINKS during cascades when bankruptcies exceed the seized collateral. After the May 2021 cascade, Binance had to publicly top up the fund; the FTX collapse drained their fund entirely.
ADL ranking — why high-leverage profitable traders get hit first
ADL ranking = (P&L / position notional) × leverage. The intuition: among profitable counterparties, ADL targets the ones with the highest 'reward-to-stake ratio' — meaning the trader who made the most efficient use of their margin gets clawed back first. A 20× leveraged trader up 50% on their notional ranks WAY higher than a 2× leveraged trader up 30%. This punishes leverage-stackers; it spares conservative position holders.
Why ADL is actually a feature, not a bug
Without ADL, the exchange would have to socialise losses across ALL traders (everyone takes a haircut, even cash holders) or default outright. ADL is the contained version: only profitable counterparties on the opposite side, sorted by rank. It's also publicly documented and traders can position to avoid it (lower leverage = lower ADL rank). The horror stories on Twitter are mostly traders who DIDN'T read the docs before going 50× and getting clawed back during a cascade.
Frequently asked questions
+Has ADL actually happened on major exchanges?
Yes, regularly during big cascades. Notable instances: March 12 2020 (BitMEX ADL'd extensively as their insurance fund couldn't absorb the BTC crash), Aug 2021 (Binance ADL on some altcoin pairs after a flash crash), Nov 2022 (multiple exchanges during FTX panic). Each event clawed back tens of millions from profitable counterparties. The exchanges publish post-mortems but most retail traders don't read them.
+How do I know if I'm at risk of ADL?
Most exchanges show an 'ADL ranking indicator' on your position UI — usually 5 LED-style bars. 1 bar = low rank (safe). 5 bars = highest rank (you'll be ADL'd first in a cascade). The bars update in real-time as your P&L and the system's stress changes. Watch this if you're holding profitable leveraged positions during volatile periods.
+What's the difference between insurance fund and SAFU?
Insurance fund: covers leverage-trading bankruptcies (perpetual market specific). SAFU (Secure Asset Fund for Users): Binance's exchange-wide reserve for covering hacks and other exchange-wide losses. They're separate pools with separate purposes. SAFU has covered the 2019 Binance hack ($40M); insurance fund covers ongoing perp liquidation overruns. SAFU is rare-event; insurance fund is daily operations.
+Can I withdraw money WHILE the insurance fund is exhausted?
Usually yes — withdrawals come from spot reserves, not the insurance fund. But if multiple events deplete BOTH spot reserves AND insurance funds, the exchange becomes insolvent. This is what FTX failed at: the insurance fund was depleted, spot reserves were misallocated, and the exchange couldn't cover both withdrawals AND derivative losses. The right defence is: don't keep large balances on any single exchange.
+Why does the simulator show no clawbacks sometimes?
If the insurance fund balance is bigger than the bankruptcy loss, no ADL triggers. Try lowering the fund balance or increasing the bankruptcy loss to force ADL. Also — if the bankrupt trader is LONG, only SHORT counterparties are eligible for clawback (and vice versa). If all your counterparties are on the same side as the bankrupt trader, no ADL is possible; the exchange absorbs the loss directly.