Insurance Fund
An insurance fund is a pool maintained by some derivatives venues to absorb certain losses arising from liquidations that cannot be closed at favorable enough prices.
✦ Key Insight
It is part of the counterparty and liquidation-risk structure of leveraged crypto trading.
✕ Common Misconceptions
An insurance fund is not deposit insurance and does not guarantee that users cannot lose money.
Detailed Explanation
In Practice
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Auto-Deleveraging (ADL)
Auto-deleveraging is a derivatives risk mechanism that can reduce profitable opposing positions when losses cannot be fully covered through normal liquidation processes.
Margin
Margin is capital deposited or maintained to support a leveraged trading position.
Liquidation
Liquidation is the forced reduction or closure of a leveraged or collateralized position when required risk or collateral thresholds are breached.
Leverage
Leverage allows a trader to control a position larger than the capital committed to support it.
Counterparty Risk
Counterparty risk is the possibility that the other party to a trade, custody arrangement, loan, or contract fails to meet its obligations.