What is Insurance Fund

An in-depth explanation of the concept of an insurance fund

Updated over a week ago

What is Insurance Fund?

Insurance funds act as safety nets, shielding bankrupt traders from unforeseen losses and ensuring that the profitable traders' earnings are fully distributed. The basic goal of an insurance fund is to reduce the occurrences of counterparty liquidations. Positions of competing traders are immediately liquidated in counterparty liquidations to cover a position held by a bankrupt trader.

Under these circumstances, counterparty liquidations are likely to occur for opposing successful positions with significant leverage. By utilizing the collateral from non-bankrupt users' fees to cover the losses of bankrupt users, insurance funds address this issue.

Working Mechanism of Insurance Fund

If a trader in liquidation (Total Account Value < Maintenance Margin (USD)) has less than 0 USDT worth after closing out all of his positions, or if the trader is otherwise unable to close out positions, CoinUnited will take over the remaining positions.

CoinUnited would usually use the Insurance Fund to take up the positions and eventually release them onto the market. Users who avoid bankruptcy will pay liquidation costs to the Insurance Fund. Counterparty-liquidation will take place if the insurance fund is unable to accept holdings from the liquidations.

A maximum net notional position check will be applied to the fund. The fund's maximum position notional in the market, which is by default 100% of the insurance fund's size, will not be permitted to be exceeded. Counterparty-liquidation will apply to any position whose notional value rises beyond the maximum.

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