Insurance Fund

What is the Insurance Fund?

The insurance fund is a mechanism designed to compensate for losses incurred during liquidations under extreme market conditions. Its purpose is to reduce the likelihood of users' positions being subject to Auto-Deleveraging (ADL).

How are Insurance Funds Generated?

The profits generated from positions taken over by the liquidation engine are injected into the insurance fund. When a liquidation occurs, the liquidation engine assumes control of the user's position and remaining margin at the bankruptcy price. If the liquidation engine closes the position at a more favorable price than the bankruptcy price, it generates profits, which are then added to the insurance fund.

How are Insurance Funds Utilized?

Upon a liquidation event, the liquidation engine takes over the user's position and remaining margin at the bankruptcy price. After the insurance fund compensates a certain amount, it calculates the closing price for the assumed position and submits a liquidation order to the market at that price. If the order cannot be executed, ADL is triggered. By utilizing the insurance fund compensation, it becomes easier to close the position, reducing the possibility of Auto-Deleveraging (ADL) for users.

All perpetual contracts denominated in the same margin currency share a common insurance fund.