The Insurance fund exists to protect traders against contract losses and to minimize the triggering of auto deleveraging (ADL). If the final closing price* is worse than the bankruptcy price, the insurance fund covers the loss instead of triggering the auto deleveraging system. MCS transparently manages the insurance fund, and traders can view the current insurance fund balance and details on MCS's insurance fund page and widget.
*Final Closing Price: The price at which the liquidating position is actually filled when the position is liquidated.
Insurance Fund Logic
All positions have a liquidation price and a bankruptcy price. The liquidation price is the price at which liquidation is triggered. When the value of the position reaches the bankruptcy price, all margins on the held position are zero. If the final closing price of the position is better than the bankruptcy price, the balance remaining after the liquidation is added to the insurance fund. Conversely, if the final liquidation price is worse than the bankruptcy price, a contract loss is incurred, which is covered by the insurance fund. If the amount of insurance funds is insufficient to cover the contract losses, the ADL system will be activated.
<Insurance Fund Logic Example>
David is long in BTC/USDT contracts with a liquidation price of 12,500 USDT and a bankruptcy price of 12,000 USDT. If the Mark Price reaches 12,500 USDT, the trader's position is liquidated. If the final closing price is 12,300 USDT which is higher than the bankrupt price of 12,000 USDT, the remaining margin will be transferred to the Insurance Fund. However, if the final closing price is 11,500 USDT, which is lower than the bankrupt price of 12,000 USDT, then the contract loss due to the position liquidation will be compensated by the insurance fund.