How Does the Size of an Insurance Fund Influence the Maximum Leverage Offered by an Exchange?

The size of the insurance fund directly influences the risk an exchange is willing to take, which in turn dictates the maximum leverage offered. A larger, well-capitalized insurance fund provides a bigger buffer against sudden, large-scale liquidations and negative equity events.

This greater safety margin allows the exchange to comfortably offer higher maximum leverage to its users, as the potential losses from highly leveraged positions are less likely to bankrupt the exchange or trigger the disruptive ADL process.