The recent 10 October crypto market crash, marked by over $19 billion in liquidations and the widespread triggering of Auto-Deleveraging (ADL) mechanisms, has exposed some of the structural fragility in digital asset markets.

While many have focused on the scale of the losses, the deeper issue lies in the systemic design flaws that ADL reveals, and the urgent need for institutional-grade infrastructure to support the next phase of crypto and digital asset market evolution and institutional adoption.

To Win, Only to Lose

ADL may be trending but is a new term to many. Simply put, ADL is an automated process executed by exchanges to cover losses from a liquidated position that the exchange cannot fully absorb, despite any insurance buffers it may have. When an exchange’s insurance fund is depleted, usually because of forced liquidations during periods of high volatility, ADL forcibly closes profitable positions held by other traders (typically those with the highest leverage and profits) to offset losses from liquidated accounts.

So, even if you are on the winning side of a trade, counterparty default elsewhere on the exchange could see your position reduced or closed out prematurely to protect the exchange’s solvency. As noted by Don Wilson, CEO and Founder of trading firm DRW, it’s destabilising: “That’s a design flaw – not a market failure.“

It means hedges, not just outright positions, are cancelled, potentially leaving participants exposed to directional market moves. It penalises prudent traders and undermines confidence in the market’s integrity when trades are arbitrarily cancelled. As Christopher Perkins, President of CoinFund, aptly noted on LinkedIn, “The issue isn’t perps. It’s the lack of thoughtful clearing. Across DeFi and especially CeFi, jumping to auto-deleveraging (ADL) undermines market confidence.“

At ClearToken, we thoroughly agree.

ADL: A Symptom of Immaturity, Not a Solution

As highlighted by others, ADL is often misunderstood. It is not a bug, it’s a feature born of necessity, created to provide some degree of risk management for crypto exchange operators through a direct form of loss mutualisation. It’s a symptom of a market architecture that prioritises speed and decentralisation over resilience and fairness.

“a design flaw – not a market failure”

ADL is currently the go to when auto-liquidations build up in a system that lacks the sophistication to manage risk holistically. However, ADL is not a sustainable mechanism for managing risk in a mature institutional focused market structure. It’s a stopgap that reflects the absence of financial market infrastructure. ADL exists because exchanges lack the capital buffers, licensed clearing infrastructure, and risk mutualisation mechanisms that traditional financial markets take for granted.

How TradFi Clearing Houses Handle Market Instability

By contrast, in mature financial markets, such risk management is the responsibility of regulated financial market infrastructure: clearing houses/central counterparties (CCP), not the exchanges. CCPs have a slew of capital layers to help manage participants’ exposure and market contagion through risk management processes and default funds which align the incentives of all participants.

Known as a ‘default waterfall’, layers of capital contributions and responsibilities are exhausted one by one in a default event. Including initial and variation margin, clearing house ‘skin-in-the-game’, member (broker/FCM) capital and a mutualised default fund, the waterfall buffers against sudden shocks. This in turn helps mitigate against rapid liquidations and the resulting additional selling pressure on order books.

“The issue isn’t perps. It’s the lack of thoughtful clearing.”

When combined with a robust default management process (which includes non-defaulting member participation designed to incentivise the restoration of market integrity without having to resort to the mutualised default fund), these incentives and capital layers generally prevent the need to resort of variation margin haircutting and ‘rights of assessment’ (the CCP’s right to cancel or reassign positions) which are the clearing house equivalents of ADL mechanisms.

With a CCP, ADL mechanisms are truly a measure of last resort.

The Case for Central Clearing in Digital Assets

ClearToken was founded to address precisely these shortcomings. Our mission is to bring CCP clearing to digital assets, starting with spot crypto, stablecoins, and fiat, and extending to derivatives forwards and repo.

We are finalising our CCP application with the Bank of England and will be pursuing recognition as a DCO with the CFTC and a Clearing House with ADGM, enabling 24/7, market neutral, horizontal infrastructure for institutional exchanges and participants.

Central clearing offers several advantages over the current fragmented model:

• Risk Mutualisation: Losses are absorbed by clearing members, and then in the event of a default, collectively, not by individual traders having positions cancelled.
• Transparency: Margin requirements, default waterfalls, and liquidation protocols are clearly defined and required by regulation.
• Resilience: CCPs are designed and incentivised to withstand extreme market events without resorting to ADL-style interventions.

The recent crash underscores the urgency of adopting these principles in crypto markets. Exchanges should not be forced to choose between insolvency and penalising their most successful users. Participants have been forced to confront a worst-case scenario in real-time with exchange risk management and transparency under scrutiny like never before. To become the new digital rails for all digital assets, including equities and bonds, the crypto industry must evolve.

We believe that every liquid asset will be available in tokenised form by the end of the decade, but that it is prudentially regulated financial market infrastructure that will enable tokenisation to become mainstream.

It’s Time We Moved Beyond This

ClearToken is majority owned by market participants and is building the missing financial market infrastructure for digital assets – one that supports multiple exchanges, 24/7 trading, cross-border interoperability, and regulatory compliance without sacrificing fairness or transparency.

We invite exchanges, brokers, banks and other institutional participants to join us in shaping a future where crypto and digital asset markets are not just fast and decentralised, but also safe, resilient, and equitable.