Author: Wu Says Blockchain
In October 2025, the decentralized derivatives trading platform Hyperliquid triggered its Auto-Deleveraging (ADL) mechanism for the first time in over two years of operation. This means that market volatility has become so severe that even the platform's insurance fund (HLP) cannot fully absorb the risk. To understand the significance of this event, we must first clarify two core concepts: What is HLP? Why does ADL exist?
What is HLP? — Hyperliquid's "Insurance Fund + Liquidity Engine"
HLP, which stands for Hyperliquid Protocol Vault, literally translates to "protocol vault." Its role can be summarized in one sentence: to provide the last line of liquidity defense for the market. The official website describes it as: Hyperliquidity Provider (HLP) is a protocol vault that does market making and liquidations and receives a portion of trading fees.
1. Analogous Explanation: Public Safe
Imagine Hyperliquid as 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 coverage for the trading market.
2. Two Core Responsibilities
(1) Maintain Market Liquidity
When the market lacks buyers and sellers, HLP will automatically provide quotes or take over positions to keep the order book healthy, thereby reducing slippage and maintaining the trading experience.
(2) Assume Backstop Liquidation Role
When a trader's position incurs significant losses and is forcibly liquidated, the system will attempt to sell (or buy) their position in the market. However, in extreme market conditions, there may not be enough counterparties on the order book. At this point, HLP will step in — it receives the remaining collateral of the losing position and continues to hold the position until the market recovers. In other words, HLP is Hyperliquid's public welfare mechanism: it ensures that the system remains solvent during extreme market conditions, preventing the exchange from experiencing "bad debts" or negative assets. To illustrate:
If Hyperliquid is a casino, traders are betting on the price of BTC. If someone loses everything, they must be kicked out. But if no one is willing to take their seat at the table, HLP acts like a "substitute player" sent by the casino owner, using its own money to ensure the game continues.
HLP is further divided into multiple child vaults to diversify risk and prevent the severe fluctuations of a single market from dragging down the entire system.
What is ADL? — The System's "Last Fuse"
ADL (Auto-Deleveraging), which stands for automatic deleveraging, is the last line of defense in the liquidation mechanism. It is only triggered when all conventional means (market liquidation, HLP assumption) fail.
Why is liquidation necessary?
The perpetual contract market is essentially a zero-sum system:
Every long position corresponds to an equal short position.
When prices fluctuate significantly, the margin of the losing party may be exhausted.
To prevent "negative assets" (i.e., the system owing money), the exchange must promptly liquidate the losing party. The goal of liquidation is to maintain overall capital balance in the system, ensuring that winners can receive their money while losers cannot "default."
The "Three-Step Waterfall" of Liquidation
The liquidation process of Hyperliquid can be imagined as a three-tier waterfall:
The third step is the first activation of the ADL mechanism, which we are discussing today.
How does ADL work?
When the losing party goes completely bankrupt (margin reaches zero), and HLP funds are insufficient to take over, the system can only forcibly "reduce positions" from the profitable side to maintain market balance. Triggering and execution logic:
· Triggered Side: The losing party (e.g., long positions crashing).
· Providing Side: The profitable party (e.g., short positions making a fortune).
The system will prioritize the traders to be liquidated based on the following criteria: most profit + highest leverage + largest position. In other words, the higher the leverage and profit of a trader, the more likely they are to be "kicked out" in extreme market conditions. This design of "forced exit" ensures the platform's capital balance and prevents system bankruptcy.
Real-world analogy:
It's like an overbooked flight; the airline first offers high prices to ask people to deplane; if no one volunteers, they randomly draw lots, but Hyperliquid's ADL is "prioritizing kicking out the first-class big shots" — because they occupy the most resources and pose the greatest risk.
The Significance and Risks of ADL
ADL is a protective mechanism in extreme situations.
It is not "fair," but necessary.
For the platform: it ensures the stable operation of the perpetual market and prevents systemic bankruptcy.
For users: it reminds high-leverage traders that profits may also be subject to forced liquidation.
For the ecosystem: it reflects the risk governance mechanism of decentralized derivatives platforms — not relying on government or external bailouts.
Conclusion: The Inevitable Cost in Extreme Market Conditions
ADL is the "last fuse" of market mechanisms; its existence is not to punish winners but to save the entire system.
In the leveraged derivatives market, there is no "infinite counterparty." When prices fluctuate sharply 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-repair.
Background Information: On October 12, Hyperliquid founder Jeff stated:
In just 20 minutes, HLP processed positions worth billions of dollars through its backstop liquidation mechanism.
HLP's core positioning has always been as the "last liquidity provider." Contrary to some misunderstandings, HLP is a "non-malicious liquidator" — it does not deliberately select highly profitable liquidation orders but exists as a "public good" to maintain the system's solvency. It is worth emphasizing that Hyperliquid does not charge any liquidation fees.
The design of HLP (including the multi-component child vault system) is the result of countless simulations, serving both the overall interests of the protocol and effectively managing its own risks.
In fact, during the process of fully handling user position backstop liquidations, HLP's liquidation child vault also experienced insufficient collateral — this is a predetermined result of the system design: child vaults are isolated from other parts of the overall strategy. When participating in ADL, HLP enjoys the same treatment as other ordinary users, with no special exemptions.
From an overall data perspective, HLP child vaults are the largest group of addresses among the ADL triggering parties, significantly surpassing other triggering parties by an order of magnitude. The "providing side addresses" that conducted ADL counter trades with HLP child vaults achieved additional profits of hundreds of millions of dollars compared to the price levels before and after market price fluctuations.
In many other trading platforms, the liquidation mechanism is not transparent, and their liquidation engines may not have to comply with the same strict margin requirements as ordinary users. These platforms could have generated hundreds of millions in commercial revenue by taking on more backstop liquidation positions and assuming higher solvency risks — but this "risk-for-revenue" trade-off is deemed unacceptable by Hyperliquid.
Finally, I understand that this is a difficult time for many traders, and I hope the community can continue to support each other and grow together. As a contributor to Hyperliquid, I will continue to work hard to create a high-quality platform that can accommodate various financial services. This incident also reaffirms that transparency and fairness are indispensable core values of the financial system.
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