Insurance Fund

The Insurance Fund is a central safeguard in Arkham’s liquidation system. It exists to protect both traders and liquidity providers when liquidations create account deficits. By covering shortfalls, the Insurance Fund ensures that liquidations are executed smoothly without destabilizing the market.

Role of the Insurance Fund

When a trader’s account falls below the required maintenance margin and enters liquidation, their collateral may not always be enough to cover the position’s losses. If this happens, the Insurance Fund steps in.

• Covering Losses: The Insurance Fund makes up any negative balance so that liquidated positions can still be transferred at fair prices.

• Supporting LSPs: Liquidity Support Providers (LSPs) are guaranteed compensation at Mark Price ±1% spread, even if the liquidated trader’s account balance is inadequate.

• Market Stability: By absorbing these shortfalls, the Fund prevents disruptions that could otherwise spill into wider market volatility.

The system remains solvent, and liquidation proceeds without disruption.

Why the Insurance Fund Matters

• Protects Traders: Ensures no account can go deeply negative during liquidation.

• Protects LSPs: Guarantees liquidity providers fair compensation, incentivizing them to absorb risk.

• Protects the Market: Prevents forced sales or slippage that could trigger cascading liquidations.

Key Takeaways

• The Insurance Fund covers liquidation shortfalls when trader equity is insufficient.

• LSPs are guaranteed mark price ±1% settlement regardless of account balance.

• This mechanism helps to ensure liquidations are executed fairly and market stability is maintained.