Can a Depleted Insurance Fund Lead to a Loss of Collateral for Non-Bankrupt Traders?
Yes, a fully depleted insurance fund can lead to a loss of collateral for non-bankrupt traders, specifically if the exchange is forced to implement a socialized loss system. In this scenario, the remaining deficit is covered by deducting a proportional amount from the unrealized profits or, in the worst case, the collateral of all profitable traders.
This is why ADL is preferred, as it is a targeted closure, not a system-wide deduction.
Glossar
Socialized Loss
Mechanism ⎊ Socialized loss, within cryptocurrency derivatives and options trading, describes the distribution of losses across a broader participant base than those directly holding a losing position, often amplified by leveraged exposure and cascading liquidations.
Depleted Insurance Fund
Mitigation ⎊ A depleted insurance fund within cryptocurrency derivatives signifies a shortfall in collateral backing open positions, particularly impacting perpetual swaps and options contracts.