We are pleased to announce the Injective Insurance Fund. All users will soon be able to interact with insurance funds, which will be a key step towards the official launch of decentralized derivatives on Equinox.
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What is an insurance fund?
In order to understand the function of the insurance fund, it is first necessary to understand the margin system used for leveraged derivatives trading. In a nutshell, leverage allows a trader to hold a notional amount much higher than the value of the collateral deposited.
When the margin of the loser in the transaction is not enough to offset the profit of the gainer, such as in the case of a liquidation, the trader's position will be liquidated and a new trader will take over the position. If a new trader takes over at a price worse than the bankruptcy price, the insurance fund is used to fill the resulting vacancy.
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Description of liquidation system
Let's say the price of ETH is $4,000. Alice opens a long position of 1 ETH using $400 of collateral (10x leverage), while Bob opens a corresponding short position of 1 ETH using $2000 of collateral (2x leverage). If the price of Ethereum falls by 10%, i.e. to $3,600, this happens to be Alice'sbankruptcy price(Bankruptcy price), the bankruptcy price makes Alice's position worthless. At this point, Bob's short order made a profit of $400, while Alice's long order made a loss of $400 (that is, the entire position lost money).
Obviously, if the price of ETH drops by even one more dollar at this time, Alice's position will be worth less than the amount of collateral she deposited, and will no longer have enough funds to cover Bob's entire profit.
To prevent this from happening, Alice's position is liquidated (forced liquidated) once it no longer meets the minimum maintenance margin requirement. Maintenance margin is the minimum balance a trader must maintain in a margin account. The maintenance margin ratio strictly specifies the margin ratio requirements that the position value must meet in order to avoid liquidation. In Alice's case, due to the maintenance margin requirement, her position will be liquidated at an amount above the bankruptcy price (for example, at $3,680), thereby providing a buffer against positions being liquidated below the bankruptcy price. was liquidated.
In most typical trading scenarios, this buffer will allow liquidation at a price slightly better than the bankruptcy price. In this case, any remaining position value (in Alice's liquidation example, the position was liquidated at $3,680 with a remaining amount of $80)will be divided equally between the liquidator and the insurance fund($40 each). So as a result, the size of the insurance fund will increase.
However, given the volatility of trading in the cryptocurrency market, it is possible that the liquidation price will be lower than the bankruptcy price. In this case, the insurance fund is used to fill the gap. For example, if the bankruptcy price of Alice's position is $3,600, but her position is sold at $3,500, $100 needs to be withdrawn from the insurance fund to cover the difference.
To summarize the above example: after reachingbankruptcy price（Bankruptcy price）, Alice's position value will become zero. Her position can be inLiquidation priceThe position is closed. However, the price at which the exchange is actually able to sell the position is calledsecondary title。
Injective Insurance Fund
According to the Injective agreement, each derivatives market has its own unique insurance fund and has its own specific source of funds.
Before anyone can start trading in derivatives, an insurance fund must be created for that market. The initial capital of the insurance fund comes from independent insurers,UnderwritersTake the risk of this derivatives market insurance fund by staking tokens (such as USDT). Then, when a transaction occurs in that market, the insurance fund may increase or decrease depending on the liquidation behavior of that market.
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when
whenClosing Price > Bankruptcy Priceimage description
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Use of insurance funds
Conversely, ifClosing Price < Bankruptcy Priceimage description
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Pledge of Insurance Fund
Unlike most exchanges, Injective's insurance funds are market-specific. That is, there is no public pool of insurance funds, and a new insurance pool exists for every derivatives market launched on Injective. In this way, the risk-taking of the insurance pool is distributed to each independent market.
When a user underwrites a derivatives market, he pledges funds for the market, and then obtains an insurance pool token dedicated to the market. These insurance pool tokens represent proportional ownership of the insurance fund. Therefore, as the insurance fund grows from liquidation proceeds, insurance fund stakeholders will profit from the increase in the value of their insurance fund stake.
Typically, riskier markets tend to have higher staking reward rates to compensate users for the high risk they take.
Future plan
Future plan
Injective Protocol is the world's first Layer-2 derivatives DEX, which supports users to trade any type of derivatives, unleashing the full potential of borderless decentralized finance. Injective has received support from many institutions, including Pantera Capital, one of the world's top cryptocurrency venture capital firms, and Binance, a leading cryptocurrency exchange.
Injective Protocol is the world's first Layer-2 derivatives DEX, which supports users to trade any type of derivatives, unleashing the full potential of borderless decentralized finance. Injective has received support from many institutions, including Pantera Capital, one of the world's top cryptocurrency venture capital firms, and Binance, a leading cryptocurrency exchange.
