BTSE employed the insurance fund system to assist winning traders to realize their full profit and avoid being interrupted by the Auto-Deleveraging events (ADL).
The ADL mechanism protect losing traders by ensuring they will never go into negative equity, meaning their margin balance will never become negative.
If the insurance fund has sufficient balance and a liquidation order cannot be filled at the bankruptcy price, the insurance fund will be used to further lower/raise the order price by 1.0%. This function ensures liquidation orders can be executed on the market and avoid the occurrence of an ADL event.
Conversely, if the order can be filled at a price better than the bankruptcy price, the surplus balance is deposited into the insurance fund.
The insurance fund balance can be used for liquidation price improvement and for user compensation in case of an extraordinary event. We have designed the insurance fund to ensure the continuous operation of the exchange.
* Note: If the order is not filled after making a 1% price improvement, the ADL mechanism is triggered automatically to flatten the liquidated position against a winning trader. For more details about the ADL, please Click Here.
For your better understanding of the insurance fund system, please refer to the following example:
- Side: Short
- Entry Price: 8,000 USD
- Leverage: 100x
- Contract Size: 100,000 contracts (800,000 USD)
- Initial Margin: 8,000 USD
- Liquidation Price: 8,040 USD
- Bankruptcy Price: 8,080 USD
When the mark price rises above liquidation price, position is liquidated:
- The short position of 100,000 is closed immediately by the liquidation engine at the bankruptcy price with the position’s wallet wiped
- The liquidation engine short covers the same amount of contracts by buying it on market:
- If the buy liquidation order cannot be filled at the bankruptcy price (8,080 USD), insurance fund will be used to further improve the order price up to 1% (8,160.8 USD) to improve the chance of this order being filled
- If the buy liquidation order can be filled at a price superior to the bankruptcy price (e.g. 8,060 USD), the remaining margin (20 USD) will be deposited into the insurance fund
- If the buy liquidation order cannot be filled at the improved price (8,160.8 USD), the system triggers the ADL mechanism at bankruptcy price to protect the losing trader from going into negative equity