*This post has been written by Hedgehog, an MCS influencer and one of Korea's famous cryptocurrency key opinion leaders.
Greetings from MCS, the derivatives trading platform where traders ALWAYS come first.
Today, we will look at the concept of insurance funds, an essential components of cryptocurrency perpetual contracts.
🎯 What is the Insurance Fund?
Insurance funds exist to prevent contract losses and to minimize the initiation of Auto-Deleveraging (ADL). If the final execution price* is worse than the bankruptcy price, the insurance fund covers the loss instead of implementing the ADL system. The MCS Cryptocurrency Derivatives Exchange transparently operates the insurance fund, and all MCS traders can check the current balance and fund details of the insurance fund on the insurance fund page* of the exchange.
*Final Execution Price : The actual filled price of the Liquidation Engine when a position is liquidated.
*Insurance Fund Page : https://mycoinstory.com/contract/insurance-history
It's hard to understand with only the explanation above right? T.T Hedgehog will explain it in further detail.
If all positions do not meet the minimum maintenance margin requirement, the positions will be liquidated. When liquidation occurs, the clearing house of the MCS cryptocurrency derivatives exchange acquires the liquidated positions and closes them. If the clearing house of MCS clears the position at a higher price than the bankruptcy price of the position, some of the margin will remain as surplus, this will be added and accumulated to the insurance fund. Conversely, if a contract loss occurs, the insurance fund compensates for the loss.
In short, the insurance fund is a mechanism that can compensate for contract losses that may occur in the process of closing liquidated positions by the clearing house.
🎯 How Insurance Funds Operate
All positions have a liquidation price and a bankruptcy price. The liquidation price is the price that triggers the liquidation (When margin reaches maintenance margin). When the market price reaches the bankruptcy price, it means the margin for that position is zero. If the final execution price of a position is better than the bankruptcy price, the remaining margin balance after liquidation is added to the insurance fund. Conversely, if the final execution price is lower than the bankruptcy price, contract loss will occur, which is covered by the insurance fund.
Bob has a BTC/USDT perpetual contract, with liquidation price at 12,500 USDT and bankruptcy price at 12,000 USDT. When the mark price reaches 12,500 USDT, Bob's position is liquidated. At this time, the MCS clearing house acquires Bob's liquidated position and closes the position. If the final execution price is 12,300 USDT, which is higher than the bankruptcy price of 12,000 USDT, the margin remaining after the liquidation of the position is added to the insurance fund. However, if the final execution price is 11,500 USDT, which is lower than the bankruptcy price of 12,000 USDT, the contract loss incurred will be covered by the insurance fund.
I am a Bitcoin margin trader, Hedgehog. Thank you for reading this post.
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