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Insurance fund Meaning

A pool of capital set aside by a leveraged trading exchange to cover "bankrupt" positions. In high-leverage trading, if a trader's position is liquidated but the market moves so fast that the position is closed at a price worse than the trader's maintenance margin, the exchange faces a deficit.

The insurance fund steps in to pay out the winning traders in these scenarios, preventing the exchange from having to "claw back" profits from other successful traders (a process called socialized losses). The fund is typically replenished through small fees collected from "successful" liquidations.

A large and growing insurance fund is a sign of a robust exchange that can handle extreme volatility without defaulting on its obligations to users.

If the fund is drained to zero, it indicates that the exchange’s liquidation system is failing to keep up with the market, posing a risk to all participants.

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