Insurance Fund

An insurance fund acts as a solvency net for the protocol in the event of any bankrupt positions. Often, positions may not be liquidated in time at their liquidation price, and/or liquidators may not have enough capacity to liquidate them. In such cases, the cash balance of these accounts falls below 0, meaning that sustained loss is more than the margin deposited. The insurance fund then steps in to pay off these liabilities and ensures that the protocol is liquid enough at all times to pay out profitable positions.

What are Bankrupt Positions?

Bankrupt positions are positions with a negative cash balance, indicating higher negative unrealized PnL than the margin that the account (for cross margin) or the position (for isolated margin) has deposited. Such cases arise mostly because these positions were not liquidated in time at their zero price (liquidation price), and/or liquidators may not have enough capacity to liquidate them.

How does the Insurance Fund operate?

As stated before, the insurance fund acts as a solvency net for the protocol by paying off excess liabilities of bankrupt positions and ensuring there is enough liquidity to pay off profitable positions. The Hxro Network has implemented an insurance fund mainly denominated in USDC to cover the liabilities of bankrupt positions.

Margin is posted in USDC (see Collateral), and exchange fees are collected in USDC (see Fees). Hence, the insurance fund is denominated in USDC as well. This USDC insurance fund is then used to pay off liabilities in USDC.

Currently, users CANNOT deposit into the Hxro Network insurance fund. Thus, by default, all insurance funds on Hxro Network are Isolated, not open for the public to deposit, and are funded exclusively using premiums.