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In October 2025, decentralized derivatives trading reachedtowerHyperliquidtransportBattalion triggered for the first time in more than two yearsAuto-Deleveraging across margins (ADL, Auto-Deleveraging)mechanism.This means that the market volatility is so severe that even the platform insurance vault (HLP) cannot fully absorb the risk.To understand the significance of this event, two core concepts must first be clarified:What is HLP?Why does ADL exist?
What is HLP?——— Hyperliquid’s “Insurance Fund + Liquidity Engine”
HLP, meaningHyperliquid ProtocolVault, literally translated as “agreement treasury”.Its function can be summarized in one sentence:Provide the last line of liquidity defense for the market.The official website introduction is:Hyperliquidity Provider (HLP) is a protocol vault that does market making and liquidations and receives a portion of trading fees.
1. Analogy explanation: public safe
Imagine Hyperliquid is a decentralized crypto derivatives exchange.
HLP is like a “shared safe” or “platform public fund pool”: anyone can deposit assets into it; the funds will be used to provide liquidity and risk protection for the trading market.
2. Two core responsibilities
(1) Maintain market liquidity
When the market lacks buyers and sellers, HLP automatically provides quotes or takes over positions, keeping the order book healthy, thereby reducing slippage and maintaining the trading experience.
(2) Assume the “backup role” of liquidation (Backstop Liquidation)
When a trader’s position loses too much and is forced to liquidate, the system will try to sell (or buy) his position in the market.However, in extreme market conditions, the order book may not be at allNot enough opponents.At this point, HLP will step in to take over – it will receive the remaining collateral of the losing position and continue to hold the position until the market recovers.In other words, HLP is Hyperliquid’s “public welfare mechanism”: It ensures that the system remains stable under extreme market conditionssolvency, to prevent “bad debts” or negative equity on the exchange.To give an analogy:
If Hyperliquid were a casino, traders were betting on the BTC price.Someone loses everything and needs to be kicked out.But if no one wants to take his table seat, the HLP is like a “replacement player” sent by the casino owner to top it off with his own money to keep the game going.
HLP is internally divided into multiplechild vault, used to spread risks and prevent violent fluctuations in a single market from bringing down the entire system.
What are ADLs?— — The “last fuse” of the system
ADL (Auto-Deleveraging), full nameAutomatic deleveraging, is the last line of defense of the liquidation mechanism.It will only be triggered when all conventional means (market clearing, HLP undertaking) fail.
Why is liquidation needed?
The perpetual contract market is essentially azero sum system:
Each long (call) position corresponds to an equal amountShort (bearish) position.
When prices fluctuate significantly, the losing party’s margin may be exhausted.
In order to prevent the occurrence of “negative equity” (that is, the system owes money), the exchange must liquidate the losing parties in a timely manner.The goal of liquidation is to maintain the overall balance of funds in the system, ensuring that winners can get their money and losers cannot “default.”
The “three-step waterfall” of liquidation
Hyperliquid’s liquidation process can be imagined as a three-tiered waterfall:
This third step is what we are doing nowDiscussed every dayFirst launch of the ADL mechanism.
How does ADL work?
When the losing party is completely bankrupt (the margin returns to zero) and the HLP funds are insufficient to take over, the system will onlyIt can force “position reduction” from the profit side to maintain market balance.Trigger and execution logic:
· Triggered Side: The losing side (such as the long position plummeting and losing money).
·Providing Side: The profitable party (such as short profit).
The system will select objects to be lightened according to the following priorities:The most profit + the highest leverage + the largest positiontraders will be forced to liquidate their positions first.In other words, the more highly leveraged and high-yield large investors are, the easier it is to be “kicked out” in extreme market conditions.This “forced disembarkation” design ensures the balance of the platform’s funds and prevents the system from going bankrupt.
Analogy to reality:
Just like when a flight is overbooked, the airline will first pay a high price to get people off the plane; if no one volunteers, they will draw lots randomly, but Hyperliquid’s ADL is “the one who gives priority to first class” – because they occupy the most resources and have the greatest risk.
The significance and risks of ADL
ADL is aProtection mechanism in extreme situations.
It’s not “fair” butnecessary.
For the platform: ensure the stable operation of the sustainable market and prevent systemic bankruptcy.
For users: a reminder for high leverage traders,Profits may also result in passive closing of positions.
For ecology: embodying the advantages of a decentralized derivatives platformrisk autonomy mechanism——— Not relying on government or external aid.
Conclusion: The inevitable price of extreme market conditions
ADL isThe “last fuse” of the market mechanism, its purpose is not to punish winners, but tosave the whole system.
In the leveraged derivatives market, there is no “unlimited counterparty”.When prices fluctuate wildly and liquidity dries up, automatic deleveraging ensures that this complex “zero-sum casino” can continue to operate.In other words, ADL is not a disaster but a sign of the market’s self-healing.
Background information: Hyerliquid founder Jeff posted on October 12:
In a 20-minute period, HLP processed billions of dollars worth of positions through the fallback liquidation mechanism.
HLP’s core positioning has always been the “liquidity provider of last resort”.Contrary to some misunderstandings, HLP is a “non-malicious liquidator” – it does not deliberately select highly profitable liquidation orders, but exists as a “public product” to maintain the solvency of the system.It’s worth highlighting that Hyperliquid does not charge any liquidation fees.
The design of HLP (including the multi-component molecular vault system) is the result of numerous simulations and verifications, which can not only serve the overall interests of the protocol to the greatest extent, but also effectively manage its own risks.
In fact, in the process of fully processing the backup liquidation of user positions, HLP’s liquidator sub-treasury itself also became undercollateralized – this is an established result of the system design: the sub-treasury is isolated from other parts of the overall strategy.When participating in ADL, HLPs are treated exactly the same as other ordinary users without any special exemptions.
Judging from the overall data, the HLP sub-treasury is the largest address group among ADL triggering parties, and its scale far exceeds other triggering parties by more than an order of magnitude.The “provider address” that conducts ADL counterparty transactions with the HLP sub-treasury has achieved hundreds of millions of dollars in additional profits compared to the price levels before and after the market price changes.
On many other trading platforms, the clearing mechanism is not transparent, and their clearing engines may not be subject to the same strict margin requirements as ordinary users.These platforms could have gained hundreds of millions of dollars in commercial revenue by taking on more reserve liquidation positions and taking on higher repayment risks – but this “risk-for-revenue” trade-off is unacceptable to Hyperliquid.
Finally, I understand these are difficult times for many traders and hope the community can continue to support each other and grow together.As a contributor to Hyperliquid, I will continue to go all out to build a high-quality platform that can accommodate all types of financial businesses.This incident has once again confirmed that transparency and fairness are indispensable core values of the financial system.
