What Is the Function of an ‘Insurance Fund’ on a Crypto Derivatives Exchange?

An insurance fund serves as a pool of capital designed to cover losses that occur when a liquidated position cannot be closed at a price better than the bankruptcy price. These losses, known as 'negative equity,' would otherwise be socialized among all profitable traders via an auto-deleveraging (ADL) system.

The fund absorbs these deficits, protecting profitable traders and maintaining market stability.