How Does a DEX Typically Manage Liquidation Risk without a Central Insurance Fund?

Decentralized exchanges (DEXs) often use a decentralized risk-sharing mechanism, such as a community-funded pool or a protocol-level insurance vault. Liquidation is often handled by external liquidators incentivized by a fee, and any resulting deficit is drawn from the community pool.

Some also rely on over-collateralization to minimize the chance of a deficit.