What is Insurance Fund?
Let's find out Insurance Fund meaning, definition in crypto, what is Insurance Fund, and all other detailed facts.
The insurance fund is especially important for cryptocurrency protocols and derivatives exchanges because it serves as a safeguard against contract loss in leveraged trading. In addition, it ensures that traders wouldn’t go bankrupt in the event of liquidations. Usually, funding for the insurance funds is provided using liquidation penalties and exchange fees.
Each position in leveraged trading has a liquidation and bankruptcy price. If the liquidation price of a position exceeds the bankruptcy price, the trade is closed and liquidated, with the remaining margin often going to the insurance fund. If the liquidation price is lower than the bankruptcy price, the loss is covered by the insurance fund.
In order to ensure the exchange's liquidity, exchange operators and protocol designers must carefully consider insurance fund health when developing, constructing, and managing a leveraged trading exchange.