Two months after the October 10 crypto market meltdown that saw $19 billion in positions liquidated, Gauntlet CEO Tarun Chitra has claimed that the popular automatic deleveraging (ADL) mechanism led to HyperLiquid’s huge losses.
In a lengthy post on X, Chitra said over $650 million was automatically deleveraged from profitable trader positions. That amount, he claims, was 28 times the potential bad debt facing exchanges that used ADL.
This “massacre of innocent people” could be avoided with a new ADL algorithm, the attached 95-page report explains.
read more: Did Binance’s USDe “Depeg” cost the exchange millions of dollars?
Automatic deleveraging with autopilot
Chitra describes ADL as a “last resort” that applies “haircuts” to traders who are making profits to “cover bad debts in insolvent positions”.
The decade-old “queue” algorithm is widely used on perpetual futures platforms such as Binance, Hyperliquid, and Lighter.
However, under extreme market conditions, repeated activation of the ADL can causeGreedy queuing strategies fail completely”
The strategy allocates “haircuts” based on profits and leverage, which concentrates losses to the biggest winners while exceeding the amount needed to liquidate, Chitra said.
He proposes a “risk-aware proration” algorithm that allocates ADL based on the leverage of each position.
This post recognizes that there is no perfect (ADL) strategy. However, the so-called ADL Trilema The new approach appears to significantly outperform Queue in terms of (solvency, equity, and revenue) based on Hyperliquid data as of October 10th.
Chitra concludes by calling for further innovation in the design of algorithmic liquidation: “ADL was invented in 2015 as a Band-Aid. We haven’t even started exploring the design space yet.”
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hyperlivid
In response to Chitra’s post, HyperLiquid’s Jeff Yang quipped, “Those who can do it, do it. Those who can’t, damn it.”
However, rather than directly responding to claims of inefficient automatic deleveraging, he disputes the description of ADL’s relationship with HyperLiquid’s HLP Insurance Fund.
He accused Chitra of “spreading lies cloaked in fancy ML jargon to sound smart”.
Other Hyperliquid supporters chimed in, pointing out obvious inaccuracies and bias from investing in competitors.
read more: ZKasino Exploiter liquidated $27 million in hyperliquid trading
In the wake of the October 10 crash, Yang argued: “ADL generated hundreds of millions of dollars in net profits for its users.” Close profitable short positions at favorable prices”
He emphasized that the platform’s ADL queue incorporates “both used P&L and unrealized P&L” and thanked users for their feedback. He also hinted that he would study “whether we can make significant improvements that are worth making it more complex.”
