Injective Insurance Fund

Injective released the Injective Insurance Fund, where all users will be able to interact with the Insurance Fund shortly, which will serve as a key step for launching decentralized derivatives on Equinox.

In order to understand the function of an insurance fund, one must first understand the margin system used for leveraged derivatives trading. On a high level, leverage allows traders to enter into derivatives positions whose value is much higher than the collateral posted to fund the position.

As a result, it is possible that the losing party on a trade cannot afford to pay the winning party if they run out of margin, i.e. the position becomes bankrupt. When this occurs, the trader’s position is liquidated and a new trader takes over the position. In the event that the new trader takes over the position at a worse price than the bankruptcy liquidation price of the position, the insurance fund is utilized to cover the resulting deficit.

On Injective Protocol, each derivative market has its own unique insurance fund which has its own specific capitalization.

Before someone can trade on a derivative market, an insurance fund must be created for the market. Insurance funds are initially capitalized by independent underwriters who underwrite the risk of the insurance fund by means of staking the collateral token of the derivative market (e.g. USDT). Then, as trades occur on the market, the insurance fund can grow or shrink depending on the liquidation activity on that particular derivative market.

What is Injective Protocol?

Injective Protocol is the first layer-2 decentralized exchange protocol that unlocks the full potential of decentralized derivatives and borderless DeFi. Injective Protocol enables fully decentralized trading without any restrictions, allowing individuals to trade on any derivative market of their choosing. Injective Protocol is backed by a prominent group of stakeholders including Mark Cuban, Pantera Capital, and the leading cryptocurrency exchange, Binance.

📰 INFO:

https://blog.injectiveprotocol.com/the-injective-insurance-fund/