How Does Margin Utilization Impact the Insurance Fund’s Size?
High margin utilization, which means traders are highly leveraged and close to their maintenance margin, increases the risk of mass liquidation. This, in turn, increases the probability of the insurance fund being used to cover deficits.
Conversely, low margin utilization means positions are safer, reducing the demand on the fund and allowing it to grow from liquidation fees.
Glossar
Margin Utilization Impact
Leverage ⎊ The Margin Utilization Impact, within cryptocurrency derivatives, options trading, and broader financial derivatives, fundamentally reflects the ratio of notional exposure to the available margin.
Margin Utilization
Leverage ⎊ Margin utilization, within cryptocurrency and derivatives markets, represents the proportion of available margin employed for open positions; it’s a critical metric for assessing risk exposure and capital efficiency.
Insurance Fund
Mitigation ⎊ An Insurance Fund, within cryptocurrency and derivatives markets, functions as a capital reserve designed to absorb losses stemming from systemic risk or counterparty default, particularly relevant in decentralized finance (DeFi) protocols.