Insurance Fund

November 21, 2023 - Around 2 mins mins to read

Understanding the Insurance Fund

The concept of an Insurance Fund is of utmost importance in the realm of cryptocurrency derivatives exchanges and protocols. Its primary function is to act as a protective measure against potential losses incurred in leveraged trading. Additionally, it assumes the responsibility of compensating traders in cases of liquidations resulting from their failure to take timely action to prevent their open positions from going bankrupt. Typically, insurance funds are funded through exchange fees, liquidation penalties, or other similar methods.

In leveraged trading, each position is assigned a liquidation price and a bankruptcy price. If the liquidation price surpasses the bankruptcy price, the position is closed and liquidated. In such instances, a portion of the remaining margin is usually contributed to the insurance fund. Conversely, if the liquidation price falls below the bankruptcy price, the insurance fund covers the resulting losses.

When designing, constructing, and operating an exchange that offers leveraged trading, exchange operators and protocol designers must give careful consideration to the well-being of the insurance fund. This is crucial to ensure the financial stability and solvency of the exchange.

Author: Yenwen Feng – Co-Founder at Perpetual Protocol

Yenwen Feng is a seasoned professional in the fields of cryptocurrency and technology. With a wealth of experience as a CEO and co-founder of multiple startups, Yenwen has been involved in ventures such as Decore (Stripe Atlas for Crypto Companies), Cinch Network (Decentralized Derivatives), Cubie Messenger (Mobile Messenger, 500 Startups B5, 10M downloads), Gamelet, and Willmobile (Top mobile financial service app in Taiwan, acquired by Systex). Since 2019, Yenwen has been serving as the CEO and co-founder of Perpetual Protocol, a decentralized perpetual contract protocol.