What is the insurance fund of Binance Futures? How to compensate after liquidation?

The Binance Futures insurance fund ensures platform stability by covering excess losses during liquidation, preventing auto-deleveraging and maintaining market integrity.

Apr 27, 2025 at 06:42 pm

The insurance fund of Binance Futures plays a crucial role in maintaining the stability and integrity of the futures trading platform. It serves as a financial safety net that helps to cover potential losses that may occur during the liquidation process. In this article, we will delve into the details of the insurance fund, its purpose, and how it compensates traders after liquidation.

Purpose of the Insurance Fund

The primary purpose of the Binance Futures insurance fund is to ensure that the platform can handle extreme market volatility and prevent the risk of auto-deleveraging (ADL). Auto-deleveraging occurs when a trader's position is forcibly closed due to insufficient funds to cover losses, and the losses are then transferred to another trader. The insurance fund helps to mitigate this risk by absorbing losses that exceed a trader's margin.

How the Insurance Fund is Funded

The insurance fund is primarily funded through the liquidation of traders' positions. When a trader's position is liquidated, and the losses exceed the available margin, the excess loss is covered by the insurance fund. Additionally, a portion of the trading fees collected by Binance Futures is also allocated to the insurance fund to ensure its sustainability.

Mechanism of Compensation After Liquidation

When a trader's position is liquidated, and the losses exceed the available margin, the insurance fund steps in to cover the deficit. Here is a detailed explanation of how the compensation process works:

• Liquidation Occurs: When a trader's position reaches the liquidation price, the position is automatically closed to prevent further losses.
• Loss Calculation: The total loss is calculated, including any fees and funding payments.
• Margin Check: The system checks if the trader's available margin can cover the total loss.
• Insurance Fund Activation: If the total loss exceeds the available margin, the insurance fund is activated to cover the difference.
• Compensation: The insurance fund covers the excess loss, ensuring that the platform remains stable and no auto-deleveraging occurs.

Example of Insurance Fund Compensation

To better understand how the insurance fund works, let's consider an example:

• Trader A opens a long position on BTC/USDT with a margin of 1 BTC.
• Market Moves Adversely: The market moves against Trader A, and the position reaches the liquidation price.
• Liquidation Price: The position is liquidated at a price that results in a total loss of 1.2 BTC.
• Available Margin: Trader A's available margin is 1 BTC, which is insufficient to cover the total loss.
• Insurance Fund Steps In: The insurance fund covers the excess loss of 0.2 BTC, ensuring that the platform remains stable.

Monitoring and Transparency

Binance Futures maintains a high level of transparency regarding the insurance fund. The current balance of the insurance fund is publicly available on the Binance website, allowing traders to monitor its status. This transparency helps to build trust and confidence among traders.

Importance of the Insurance Fund

The insurance fund is crucial for the overall health and stability of the Binance Futures platform. It helps to:

• Prevent Auto-Deleveraging: By covering excess losses, the insurance fund prevents the need for auto-deleveraging, which can be detrimental to other traders.
• Maintain Market Integrity: The insurance fund helps to maintain the integrity of the market by ensuring that all trades are settled fairly and efficiently.
• Encourage Trading: Knowing that the insurance fund is in place can encourage traders to participate in the futures market, as it provides an additional layer of protection.

Frequently Asked Questions

Q: How often is the insurance fund updated on the Binance website?

A: The insurance fund balance is updated in real-time on the Binance website, ensuring that traders have access to the most current information.

Q: Can the insurance fund run out of funds?

A: While it is theoretically possible for the insurance fund to be depleted, Binance Futures takes measures to ensure its sustainability by allocating a portion of trading fees to the fund.

Q: Is there a maximum amount that the insurance fund can cover?

A: There is no publicly disclosed maximum amount that the insurance fund can cover. However, the fund is designed to handle extreme market conditions and prevent auto-deleveraging.

Q: How can traders contribute to the insurance fund?

A: Traders indirectly contribute to the insurance fund through the trading fees they pay, a portion of which is allocated to the fund.