AUTODELEVERAGING: $653 MILLION LOST TO A GREEDY HEURISTIC?

Summary from the TLDR Crypto newsletter

Hyperliquid and Binance's Queue ADL algorithm liquidated $653 million more trader profit than necessary to cover bad debt in a liquidation cascade on October 10. The greedy heuristic from 2015 targeted whale market makers 40+ times over 12 minutes, while risk-agnostic Pro-Rata spread losses equally without accounting for leverage differences. New research proposes Risk-Aware Pro-Rata mechanisms to reweight haircuts based on trader leverage to balance the ADL Trilemma, where no strategy simultaneously optimizes solvency, fairness, and revenue. Convex optimization shows that prior-independent strategies outperform Queue by orders of magnitude.