## Where does the money from the insurance pool come from? What is the mechanism behind it?

Each margin token has its own independent insurance pool. The source of funds for the insurance pool: 40% of the trading fee, the income of invalid brokers (30% of the trading fee), the remaining margin of liquidation, users' net loss sharing, etc. The insurance pool is mainly used for the net loss (if any) of the redemption system when users withdraw cash. The insurance pool is mainly used to redeem the system's net loss when users withdraw money.

For Example, the system liquidity pool has a balance of 1 million USDT, and the sum of all users' margin balance is 1.1 million USDT. Obviously, the system has a net loss of 100,000 USDT. At the same time, Alice tried to withdraw 1,100 USDT, then (1,100 * 1,000,000/1,100,000) = 1000 USDT is paid by the liquidity pool, and the remainder is paid by the insurance pool.

On the contrary, if the system liquidity pool has a balance of 1.1 million USDT, the sum of all users' margin balance is 1 million USDT, then the system has a net profit of 100,000 USDT. If someone tried to withdraw 1,000 USDT, then the liquidity pool redeems that 1,000 USDT, and at the same time, an additional 100 USDT will be injected into the insurance pool. For details, please read How does the insurance pool in Derify work | by Derivation Lab

## Where does the money come from (buyback fund)? Why does the insurance pool have positive balance but the balance of the buyback fund is 0?

The buyback fund originated from the overflow of the insurance pool. Balance of Buyback Fund = x * MAX(0, insurance pool balance - MAX(sum of users net profit or loss, 0)) [x∈[0, 100%], refer to system parameters]. When the balance of the insurance pool is positive, but the system net loss is greater than the balance of the insurance pool, 100% of the funds in the insurance pool will be used to redeem system loss, and will not be used for \$DRF buyback.

For example (USDT as Margin Token),

scenario 1: The balance of the insurance pool is 1,000 USDT. The system net loss is 1,200 USDT. The balance of the buyback fund is 0 USDT.

scenario 2: The balance of the insurance pool is 1,000 USDT. The system net profit is 400 USDT. The balance of the buyback fund is 1000 * 20% = 200 USDT.

scenario 3: The balance of the insurance pool is 1,000 USDT. The system net loss is 300 USDT. The balance of the buyback fund is (1000 - 300) * 20% = 140 USDT.

## What are the rules of \$DRF buyback and burn?

Each type of Margin Token has its own buyback cycle. A snapshot of the \$DRF price is taken once per cycle. If the \$DRF price during this cycle is higher than the previous cycle, buyback is not triggered; if it is lower than the previous cycle, buyback is triggered.

The maximum buyback amount is the lesser of the following three conditions:

• The balance of the buyback fund.

• The funds are required to restore the \$DRF price to the previous cycle's price.

• The funds needed to increase the \$DRF price beyond the slippage threshold.

Buybacks are made through the DEX route, converting the Margin Token into \$DRF. The exchanged \$DRF is then sent to a burn address (0x0000000000000000000000000000000000000001) to be burned. If the margin is \$DRF, it is directly burned.

For illustration (taking CAKE as the Margin Token): Presumed conditions: The buyback fund has 1000 CAKE, priced at 4 USD, the slippage threshold is 10%, and the \$DRF price in the previous cycle is 0.1 USD.

• A: If the \$DRF price this cycle is > 0.1 USD, no buyback is made

• B: If the \$DRF price this cycle is 0.095 USD, a buyback is made, either until the price becomes 0.1 USD or until the buyback fund is exhausted

• C: If the \$DRF price this cycle is 0.08 USD, a buyback is made either until the price becomes 0.088 USD (10% slippage) or until the buyback fund is exhausted

## Why is the buyback and burn rule designed this way?

1. To create upward price expectations and stimulate secondary market buying interest.

2. To buyback at lower prices, maximizing the capital efficiency of the buyback fund.

3. To control price slippage and reduce opportunities for arbitrage.