In the event of liquidation, the contract loss mechanism is used to determine which traders are selected to cover contract losses when positions cannot be liquidated at a price that is better than bankruptcy price. Currently, most exchanges use socialized loss system as their contract loss mechanism.
However, a socialized loss system has a few disadvantages:
Socialized loss system calculates the total contract loss and spreads it out proportionately to all profitable traders. With this system, a single risky trader can create a large loss for all profiting traders, including low-risk traders. Additionally, profits will be locked until settlement date, where this inflexibility may cause unnecessary inconvenience.
Bybit employs the Auto-Deleveraging(ADL) system as a contract loss mechanism for the following reasons:
1) To protect traders from being affected by large losses caused by a single risky trader.
2) Traders can easily view their current ADL rankings and thus have the option to lower their rankings by adjusting their leverage to lower levels. This is done in order to avoid being chosen by the ADL mechanism.
3) Rather than having to wait until after the settlement date, the ADL system aims to remove trade uncertainties by allowing traders to re-enter the market as soon as the Auto-Deleveraging is completed.