Insurance Fund

The insurance fund is a critical component of Defx, providing a safety net against losses in leveraged trading and protecting traders from potential bankruptcy during liquidations. This fund is primarily financed through liquidation penalties.

In leveraged trading on Defx, each position has a defined liquidation price and a bankruptcy price. Should a position's market price fall to the liquidation price, the position is closed and liquidated. Any residual margin is typically allocated to the insurance fund and market-making vault.

Conversely, if the market price exceeds the bankruptcy price at liquidation, the resultant shortfall is compensated by the insurance fund.