Insurance Fund

Unlike other leading perpetual exchanges, initial deposits cannot be lost as they are held self-custodially. The insurance fund is a tool for the Virtual Market Maker, VMM, to underwrite liquidation risk.

Without the VMM and insurance fund, users would have to directly claim their counterparty's collateral. But as previously outlined, collateral can fall below realized losses during illiquid markets. This would mean that the user's ROE would be their positions profit minus these losses. Due to the power of the Virtual Rollup, the trader's initial deposit is held self-custodially and is not at risk, but these losses could cut into a profitable trader's PNL.

Instead, liquidated positions are assumed by the VMM. While individual liquidations may be unprofitable for the VMM, the insurance pool ensures the process is profitable on average. The insurance pool is funded by liquidations that drop below 67% of the maintenance margin.