Insurance Fund
A reserve a protocol or exchange keeps to absorb bad debt or liquidation shortfalls before users take losses.
An insurance fund is a capital reserve set aside to cover shortfalls — bad debt on a lending protocol, or losses when a derivatives exchange can’t fully liquidate a position at the bankruptcy price. It’s funded from fees, liquidation penalties, or protocol revenue, and acts as the first loss-absorbing layer so ordinary users aren’t immediately socialized into losses.
The fund’s size relative to open risk is a real solvency signal: a large, transparently on-chain insurance fund is reassuring; a small or opaque one is a yellow flag. On derivatives venues, watch for “auto-deleveraging” — what happens when the insurance fund is exhausted and profitable traders’ positions get clawed back to cover losses.