Socialized Loss

Socialized loss is an anti-deleveraging mechanism where excess losses sustained on the platform are socialized across the positions of all users. For derivatives traders, losses are distributed based on the pro-rata amount of all their open positions. This means that the greater the position value, including unrealized PnL, the greater the socialized loss will be allocated to that position.

This ensures that even though a socialized deleveraging process happens, positions with relatively small positive PnL or small negative PnL are not shoved to the boundaries of liquidation.

When will Socialized Loss take place?

Socialized loss only occurs when the levered losses sustained within a particular market are greater than the liquidity in the market's insurance fund. Another way to think of this is that a socialized loss takes place if the deleveraging process carried out by the insurance fund is not enough to ease the liabilities of overleveraged positions.

Note

Socialized loss is specific to a market. This means that if there is excess bad debt in the BTCUSD-PERP market, such that even the insurance fund cannot handle it, losses will be socialized. However, this process would only be specific to traders having positions in the BTCUSD-PERP market. So, if anyone is trading the ETHUSD-PERP market in the above example, this process will not affect them.