Insurance fund
Also called: liquidation insurance fund · risk fund
Definition
An insurance fund is a reserve an exchange keeps to cover losses when liquidated positions cannot be closed at a price good enough to repay what they owe.
How insurance fund works
When a position is liquidated, the exchange tries to close it before the trader's margin runs out completely. If it closes at a better price than the bankruptcy price, the leftover margin usually goes into the insurance fund. If the market gaps and the fill is worse than the bankruptcy price, the fund pays the shortfall.
Without this buffer, profitable traders on the other side might not receive their full gains. The insurance fund is the first line of defence; auto-deleveraging (ADL) only comes in when the fund is not enough. Some exchanges keep separate funds per contract, others pool them.
Large exchanges publish their insurance fund balances, which helps you judge how well a market can handle extreme moves. A small or shrinking fund on an illiquid contract means a higher chance of ADL. On-chain perp exchanges use similar mechanisms, sometimes with a vault funded by liquidity providers instead.
Example
Suppose a trader's long has a bankruptcy price of 28,000 USDT. In a fast drop, the liquidation engine fills the position at 27,800, a 200 USDT gap per BTC on a 5 BTC position. The shortfall of 5 × 200 = 1,000 USDT comes from the insurance fund. Earlier that day another liquidation closed at 300 USDT per BTC better than its bankruptcy price on 2 BTC, adding 600 USDT to the fund.
Common mistakes
- Thinking the insurance fund protects your own margin from liquidation.
- Assuming the fund size is the same for every contract on an exchange.
- Ignoring a small insurance fund when trading high leverage on illiquid contracts.
Learn and practise
FAQ
Does the insurance fund pay me if I get liquidated?
No. It covers losses beyond the liquidated trader's margin so the exchange and counterparties are paid. Your liquidated margin is not refunded.
Where does the insurance fund money come from?
Mainly from leftover margin when liquidations close at better than the bankruptcy price, and sometimes from exchange contributions.