ADL is a major issue in funding rate arbitrage.

 ADL (Auto-Deleveraging) is an exchange-level mechanism triggered during extreme volatility when liquidity is insufficient to liquidate losing positions (order book depletion). 

In such cases, the exchange force-closes highly profitable positions (typically those with high leverage) by offsetting them against opposing orders.

Note: ADL tends to occur more frequently on short positions than on long positions.

This unintentionally causes two major issues for our funding rate arbitrage strategy:

1/ The hedge equilibrium is broken.
2/ Profitable positions are closed before losing ones (since ADL targets positions with the highest unrealized PnL).

Example: We hold an ETH long on Exchange A and an ETH short on Exchange B. 

During a sharp market dump, the position on A shows temporary losses while the position on B shows temporary gains. 

Due to ADL and liquidity shortages, Exchange B force-closes the ETH short, while the ETH long on Exchange A remains open.

Even if you immediately close the position on Exchange A, slippage risk is extremely high, potentially resulting in losses far exceeding initial expectations.

How to mitigate ADL

1/ Proactive prevention

• Reduce leverage to a safe level (based on unrealized ROI on margin; keep it below +50%).

• Partially close positions to lower unrealized PnL and avoid ADL ranking.

• Continuously monitor unrealized PnL and adjust promptly.

2/ Automated protection

• Enable the XAPY hedge bot to immediately close the opposite position if ADL occurs.

• Enable XAPY’s proprietary ADL bot, which monitors the order book and exits positions when liquidity thins beyond a defined threshold.