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Why Is the Socialized Loss Model Generally Considered Inferior to an Insurance Fund?

The socialized loss model is considered inferior because it introduces uncertainty and unpredictability for profitable traders, whose gains can be unexpectedly reduced. This discourages trading and damages confidence in the platform.

An insurance fund, by contrast, offers a dedicated, visible reserve that absorbs losses first, providing a more stable and predictable trading environment.

What Is the Difference between “Auto-Deleveraging” and Using an Insurance Fund?
Why Are Socialized Losses Considered More Detrimental to Market Sentiment than ADL?
How Does the Size of an Insurance Fund Influence the Maximum Leverage Offered by an Exchange?
How Does a Derivatives Exchange Use an Insurance Fund to Manage Liquidation Risk?