Insurance Fund
A reserve fund used to cover losses from liquidations or system imbalances.
What is Insurance Fund?
An insurance fund on a Perp DEX is a pool of digital assets, often funded by trading fees or protocol profits, used to cover losses when a trader’s liquidated position cannot be closed profitably or when the liquidity pool faces a shortfall. For instance, Hyperliquid maintains an insurance fund to protect liquidity providers from losses due to extreme market volatility or failed liquidations.
The fund acts as a safety net, ensuring the protocol remains solvent and traders are not unfairly impacted by system failures. Smart contracts manage the fund transparently, and its balance is often publicly viewable. In some cases, like on dYdX, the insurance fund may also cover rare events like oracle failures, maintaining trust in the platform.
Related Terms
Liquidity (DEX)
Liquidity on a decentralized exchange (DEX) refers to the pool of digital assets locked in smart contracts, enabling seamless token trading by ensuring sufficient supply and demand for transactions.
Consensus Layer
The protocol layer responsible for achieving agreement among nodes on the state of a blockchain network.
EigenCloud
Restaking protocol on Ethereum enabling staked ETH to secure additional services (Actively Verifiable Services, AVSs), now rebranded as a verifiable cloud for AI and compute.
Ethereum Wallet
A software or hardware tool that manages Ethereum accounts, enabling users to store, send, and receive ETH or tokens.
At The Market (ATM)
A flexible equity offering allowing sales of shares into the market at prevailing prices over time.
APY （DeFi）
Annual Percentage Yield (APY) is the annualized rate of return on an investment or loan, accounting for compound interest earned or paid over a year.