ADL (Automated Deleverage)

Automated Deleverage (ADL) is one of the key mechanisms to prevent large-scale bad debt. Its core idea is to reduce leverage proactively so the protocol does not enter a “death spiral” from mass liquidations. ADL includes deleveraging on the borrowing side and on the collteral side.

Deleverage in Practice

Triggering Auto-Deleverage

When the protocol deems that the borrow/deposit cap for TokenA needs to be adjusted, the protocol administrators will initiate ADL via a multi-sig. If the multi-sig vote passes, all affected users will be notified of the deleverage event and given a 72-hour margin-call window to take action. If enough borrowers proactively close or reduce positions so that current levels fall below the new cap, the process ends there.

Once ADL is triggered, the supply and borrow caps for TokenA will be reset. The difference between the current amounts and the new caps is the deleverage amount. Users subject to deleveraging will see a proportional reduction in the target asset and the corresponding tokens in their positions. Deleveraging typically results in a healthier loan-to-value (LTV). Users who only supply assets to Current Lending will not be affected by ADL.

Once auto-deleveraging begins, a position will be eligible for deleverage if:

(1) It contains the target asset

(2) It has a current_LTV that exceeds the liquidaition_LTV

Collateral & Debt Delverage

Collateral-side deleveraging occurs when there is excessive lending against Token_A as collateral and liquidations cannot be executed successfully. In this situation, liquidating loans collateralized by Token_A would result in losses. All users who use Token_A as collateral will be notified of the deleverage event. If a user is deleveraged, some or all of the user’s Token_A collateral will be sold on the market and the proceeds will be used to repay the debt on a pro-rata basis.

Debt-side deleveraging is the opposite. If the system carries too much Token_B debt and the price of Token_B rises, liquidators may be unable to liquidate without imposing losses on the protocol. When Token_B deleveraging is initiated, liquidators sell a portion of collateral and use the proceeds to repay debt denominated in Token_B.

When ADL is executed, all affected users are charged a dynamic ADL penalty.

NOTE:The purpose of the dynamic ADL penalty is to encourage affected users to take action within 72 hours to avoid triggering ADL.

Auto liquidation Penalty

Auto_liquidation_penalty = minimum_liquidation_penalty + (current_ltv * days_since_deleverage_initiated*K)

if:

• minimum_liquidation_penalty=50bps

• current_ltv=75%

• days_since_deleverage_initiated=2days

• K=The penalty accrued per day at 100% LTV=1%

Then:

Auto_liquidation_penalty=0.005+(0.75*2*1%)=1.505%

Dynamic Decrease in Liquidation LTV

After ADL is initiated, it continues until the protocol’s objectives are achieved. As a result, the liquidation line is reduced dynamically during the process.

deleverage_liquidation_LTV = deleverage_liquidation_LTV-(hourly_drop_bps*elapsed/3600)