🤖Lack of liquidity: Automated Deleveraging (ADL)

In the rare event that LP pools are 100% reserved, opening positions that further exacerbate the open interest imbalance are disallowed. However, closing or liquidating positions is permitted, even if it amplifies the imbalance.

The ADL (Auto-Deleveraging) mechanism comes into play. Counterparty positions are forcibly closed to provide liquidity. These positions are closed in a sequence where the most profitable ones are terminated first.

• Take the BTCUSD pair as an example: if open interests are skewed towards the long side and all WBTC are reserved, and Alice's short position triggers liquidation due to a price increase, a buy-to-close order must be placed. This action reduces the short open interest. Given that market imbalance is calculated as the difference between long and short open interests, a decrease in short open interest worsens the market imbalance.

• Since more WBTC needs to be reserved for this trade and none is available, the ADL mechanism activates, closing the most profitable long positions. This reduction in long open interest enables Alice's position to be liquidated without requiring any additional WBTC to be reserved.