Risk Engine

Liquidation Process, Insurance Funds, and ADL
The risk engine on Bluefin is designed to protect the solvency and fairness of the exchange while enabling trading with leverage. It employs a multi-layered approach, including liquidations, insurance funds, and auto-deleveraging (ADL), to counteract the risks associated with leveraged trading and potential capital drawdowns on the platform.

Level 1: Liquidation

Liquidations are the first layer of the risk engine, acting as a crucial component in clearing under-collateralized positions from the exchange. When a trader's posted collateral does not meet the minimum requirement to keep their position open, the third-party liquidators step in to liquidate the position. This process helps to prevent exchange-wide capital drawdowns that may result from inefficient liquidations, especially during periods of high volatility in the underlying spot markets. By promptly liquidating under-collateralized positions, the risk engine ensures that the exchange remains solvent and maintains a fair trading environment for all participants.

Level 2: Insurance Fund

The insurance fund serves as a capital buffer that covers losses in the event of bankrupt liquidations. It is capitalized by all traders who experience liquidations, reassuring winning traders that their profits are protected. The insurance fund works in tandem with the liquidation process to maintain the stability and fairness of the platform.

Level 3: Auto-Deleveraging (ADL)

Auto-deleveraging (ADL) is the last line of defense employed by the risk engine to protect the solvency of markets. It kicks in when a position cannot be closed above the bankruptcy price and the insurance fund is insufficient to cover the capital shortfall. On Bluefin, a permissioned ADL worker automatically deleverages bankrupt positions against top-of-queue positions from the opposite side. The ADL queue prioritizes closing the most profitable and high-leverage traders to reduce counterparty risk.
With the three levels, the risk engine on Bluefin maintains the solvency and fairness of the platform. The comprehensive risk management system safeguards the platform and its traders from the inherent risks associated with leveraged trading, ensuring a secure and fair trading environment for all participants.