What Happens If the Exchange Mismanages the Insurance Fund?

Mismanagement of the insurance fund, such as using it for operational expenses or failing to secure it properly, can lead to severe consequences. This includes a massive loss of user trust, regulatory penalties, and potential lawsuits.

Most critically, if the fund is depleted due to mismanagement, the exchange's entire risk mitigation system fails, forcing the market to rely on the disruptive Auto-Deleveraging (ADL) or a socialized loss.