Derify protocol has an insurance pool for cash-out demands that excess the liquidity pool of a derivative.
The cash-out rules of the insurance pool are as follow:
The system net profit/loss is equal to the difference between the capital balance of the liquidity pool and the margin balance of all users. If the difference is positive, which represents the net profit of the system and the net loss of the user; if the difference is negative, which represents the net loss of the system and the net profit of the user.
- When the system has a net loss (system PnL negative) and the user withdraws money, the insurance pool will inject funds into the liquidity pool in proportion to the system net loss
- When the system has a net profit (system PnL positive) and the user withdraws money, the liquidity pool will inject funds into the insurance pool in proportion to the system net profit
Funds in the insurance pool consisits of:
- apportioned net loss from traders ()
- invalid broker rewards
- fixed amount of trading fees
- remaining equity from mandatory liquidation
Funds in the insurance pool are used for:
- apportioned net profit for traders ()
- overflow to the buyback funds ()
In the long term, the probability of traders' net profit and net loss are equal, but as trading fees are constantly injecting into the insurance pool, the insurance pool will experience net inflow and grow bigger over time.
Insurance pool is the primary risk compensation mechanism for Derify protocol.