Insurance Fund
What are insurance funds and how do insurance funds work
What are insurance funds
Insurance funds serve as a safeguard when liquidation occurs, acting as a capital buffer that keeps NFEX solvent and fair. These funds provide pools of assets that protect bankrupt traders from losing more while ensuring that winning traders always receive their full profits.
NFEX utilizes insurance funds to prevent Auto-Deleveraging of traders' positions. The balance of insurance funds can grow from successful liquidation orders that are executed in the market at a price better than the bankruptcy price.
How do insurance funds work
When a user's account equity falls to or below the maintenance margin, the account is liquidated, and if the position fails to be liquidated, the account is declared bankrupt, resulting in negative equity.
To cover the losses and balance the account back from negative to zero, NFEX will utilize the Insurance Fund Protocol to take over the unfilled positions and spend assets from the insurance fund pool. If the assets in the NFEX insurance fund pool are depleted, and the insurance fund protocol is unable to accept positions from the liquidation engine, auto-deleveraging (ADL) will occur.
NOTE:
At NFEX, all NFT perpetual contracts share the same insurance fund.
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