What Is Risk Insurance?
The Risk Insurance is a risk management mechanism designed to protect traders during extreme market conditions. Its primary purpose is to cover losses caused by forced liquidation and reduce the likelihood of Auto-Deleveraging (ADL), helping to maintain market stability and a fair trading environment.
By absorbing losses that cannot be covered by liquidated positions alone, the Risk Insurance acts as a safety buffer for all users trading perpetual contracts.
How Is Risk Insurance Generated?
The Risk Insurance is funded through profits generated during the liquidation process.
When a user’s position is liquidated:
- The liquidation engine takes over the position and the remaining margin at the bankruptcy price.
- If the liquidation engine successfully closes the position in the market at a price better than the bankruptcy price, the excess amount is considered profit.
- All such profits are injected directly into Risk Insurance.
This ensures Risk Insurance grows organically from market activity, without charging additional fees to users.
How Is Risk Insurance Used?
When a liquidation occurs:
- The liquidation engine takes over the user’s position and remaining margin at the bankruptcy price.
- The Risk Insurance may be used to compensate part of the loss, allowing the liquidation engine to place closing orders at a more favorable price.
- If the position can be fully closed in the market, ADL is avoided.
- If the order cannot be executed even after Risk Insurance compensation, Auto-Deleveraging (ADL) will be triggered as a last resort.
By providing loss coverage upfront, Risk Insurance significantly reduces the frequency and impact of ADL events, improving overall user experience.
Additional Notes
- Shared Fund: All perpetual contracts that use the same margin currency share a single Risk Insurance.
- User Protection First: Risk Insurance is used before triggering ADL, prioritizing market-based liquidation whenever possible.
- No Manual Intervention Required: The entire process is handled automatically by the risk engine to ensure fairness and efficiency.
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