What is ADL Auto Deleveraging and How It Works on Backpack Borrow and Lend
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Key takeaways
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• ADL (Auto Deleveraging) activates only when normal liquidations fail. This happens if the lending pool is fully utilized or if markets move too fast for order‑book and backstop liquidations to clear risk
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• It protects lenders by matching them directly with borrowers and settling value in notional USDC terms, not necessarily in the borrowed token
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• Borrowers’ collateral may shift into different assets during settlement, but their total account value stays unchanged
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• ADL is the final layer in Backpack’s liquidation hierarchy after order‑book and backstop mechanisms
  
  

Why utilization matters
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Backpack’s lending markets run on a utilization model, which measures how much of a lending pool’s liquidity is currently borrowed. As utilization climbs, interest rates increase to attract deposits and encourage borrowers to repay. When the pool reaches one hundred percent utilization, all available tokens are lent out. Redemptions pause and new borrows stop, which prevents the pool from running dry but makes it impossible to redeem lent assets during liquidation.

Because lent tokens also serve as collateral, this situation can be risky. If a lender’s collateral position triggers liquidation when utilization is maxed out, the standard liquidation engine cannot redeem their tokens. To resolve this, Backpack uses Auto Deleveraging (ADL), which ensures lenders receive the value they are owed even when liquidity is locked.

Additional safeguards

To reduce the chance of hitting full utilization, Backpack’s interest rate model defines an optimal utilization threshold where rates start to rise more steeply. This makes borrowing increasingly costly and lending more attractive, encouraging repayments and new deposits. There is also a throttle threshold: if utilization keeps rising, the protocol pauses all redemptions and new borrows. This pause gives borrowers time to repay and allows new lenders to add liquidity before the pool is drained. These safeguards help maintain liquidity so ADL is rarely needed.

How ADL works
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When liquidation is triggered and the pool is at full utilization, ADL follows a clear sequence:
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• Liquidation trigger – A user with lent assets as collateral loses value and their position hits the liquidation threshold
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• Full utilization – The lending pool reaches one hundred percent utilization, so redemptions are temporarily blocked
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• Liquidation engine fails to redeem – The engine tries to redeem the lender’s tokens but cannot, since there is no available liquidity
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• Match with borrowers – The protocol pairs the lender with borrowers who still have collateral; every borrow on Backpack is over‑collateralized
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• Notional transfer – Value up to the size of the original loan moves from the borrower’s account to the lender’s account, measured in USDC terms|
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• Loan closure – The loan closes. The lender recovers the full value of their position, and the borrower’s collateral may shift into a different asset, but their overall account value remains the same
  
  

This sequence ensures lenders recover their value even when tokens can’t be redeemed. Borrowers do not lose more than they owe, since the transfer is capped at the size of the original loan.
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Example:

Imagine a borrower takes out 1 BTC from a lender. They no longer hold BTC in their account because they traded or withdrew it. If the market crashes and BTC trades at $100,000, the borrower’s account may go bankrupt while the lender still expects repayment. In this case, the system sells the borrower’s remaining assets and pays the lender $100,000 in notional USDC. Even in extreme volatility, ADL ensures the lender receives the equivalent value of their lent asset in dollars.

ADL during borrower default
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Auto deleveraging is not limited to full utilization events. Backpack’s risk framework uses ADL as a backstop when rapid price moves prevent the system from liquidating positions through the order book or backstop liquidity providers. For example, if a borrower owes one Bitcoin but has sold it and the price drops quickly, the protocol might not liquidate their collateral fast enough. In this edge case, ADL liquidates other assets in the borrower’s account and pays the lender the equivalent value in dollars. This layered model, combining order‑book liquidations, backstop providers and ADL, maintains market stability and protects lenders.

Managing utilization risk
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Lenders and borrowers should monitor utilization, since it affects interest rates and withdrawal options. High utilization raises borrowing costs and may delay withdrawals. Backpack’s dynamic rate model encourages repayments and new deposits when utilization rises, and the throttle threshold pauses redemptions and new borrowing before the pool is fully depleted. If utilization still reaches one hundred percent, the auto deleveraging mechanism provides a safety net by transferring value from collateralized borrowers to lenders. Understanding these mechanisms helps participants assess the rewards and risks of lending and borrowing on Backpack and highlights the importance of maintaining sufficient liquidity.

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Read more about Borrow and Lends Risks here



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Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Backpack. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Backpack is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice.

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