The Insurance Fund
Who absorbs a bad debt when a position goes bankrupt, how much cover each market gets, and what is left over for everyone else.
Every dollar a winning position takes comes out of a losing position on the other side, so a perpetual exchange only stays solvent while the losers can pay. When a market moves faster than liquidation can close a position, the losing account's collateral runs out and the debt does not, and the winners still have a valid claim. The Insurance Fund absorbs that difference before the loss reaches other traders. Without it, every shortfall would be socialized across everyone holding the same market.
The mechanism
Velocity runs a separate Insurance Fund for every spot market that can be deposited as collateral. Each fund is denominated in that market's own asset and only covers liabilities in that asset, so a SOL borrow that goes bad draws on the SOL fund, never on the quote fund. Every perpetual is quoted and settled in the quote asset, so every perp bad debt draws on the quote market's fund, which is why that one is the largest.
The fund is 100% staker-owned. There is no protocol-owned share and no way to withdraw or rebalance one, and every dollar settled into a fund accrues to its stakers as share-price appreciation. See Insurance Fund staking for how a stake is priced, what it earns, and what it risks.
Before any user has staked into a market's fund, settled revenue still accumulates so the fund is not empty on day one, and the first staker's deposit prices against it at a share price of about 1. Those bootstrap shares are permanent, non-withdrawable ballast rather than a live protocol claim on the fund's earnings.
How the fund is funded
Two streams feed each market's fund on top of what stakers contribute directly.
Revenue-pool settlement. Perpetual trading fees, liquidation fees and borrow fees land in a spot market's revenue pool, and a capped slice moves into the fund's vault on a timer, by default hourly. Both caps are on the staking page.
The lending-yield carveout. Each spot market's insurance fund fee factor diverts a fraction of its deposit-interest gains straight to the fund rather than to depositors, on no timer, so a market with borrows outstanding accrues capital continuously.
Spot trading contributes nothing: swaps charge no fee and spot orderbook trading is not enabled.
How much cover a market gets
Every perpetual market carries a contract tier, which sets a hard ceiling on how much of the shared quote fund that market may ever draw across its whole life.
| Contract tier | Lifetime insurance cap |
|---|---|
| A | $100,000,000 |
| B | $1,000,000 |
| C | $100,000 |
| Speculative | $0 |
| Highly Speculative | $0 |
| Isolated | $0 |
Read these as ceilings on configuration, not balances. A market's actual claim is its configured cap less what it has already drawn, so the cap is cumulative across every bankruptcy it ever has rather than a per-event allowance. An admin may configure a market below its tier ceiling; none can be configured above it.
A Speculative, Highly Speculative or Isolated market draws nothing from the Insurance Fund, ever. Bad debt there is absorbed by the estate, then the market's own in-transit insurance fee, then the AMM fee-provision clawback, and then it is socialized across that market's own traders. The default tier for a newly created market is Highly Speculative, so a market has to be explicitly promoted before it has any cover at all.
The riskiest listings are walled out of the shared vault so their losses cannot drain the capital backing the safe ones.
Where the fund sits in the waterfall
A bad debt is not paid by the fund first. It runs through a fixed sequence of tranches, and the fund is the second of them on both a perp and a spot bankruptcy, drawing only what the tranches above it could not cover and stopping at the market's tier cap. Liquidation and bankruptcy covers that sequence in full.
A worked example
An illustrative gap move leaves an account $1,400,000 short in a tier B perpetual after liquidation has taken everything it can. The estate pays first: say its remaining quote deposit and P&L-pool claims cover $200,000. The market's in-transit insurance fee takes the next $50,000, leaving $1,150,000.
The shared fund covers the rest, but only up to what tier B allows: $1,000,000 across the market's whole life, less anything already drawn. If it has drawn nothing before, $150,000 remains for the AMM fee-provision clawback, and only the residual after that is socialized across surviving open interest. In a Speculative market the fund would have contributed $0, and the whole $1,150,000 would have gone to the clawback and then to socialization.
What this means in practice
Cover depends on the market, not the exchange. Two positions of the same size in two markets have completely different backstops, and in three of the six tiers the backstop is zero. A market's contract tier is worth reading before sizing into it.
Socialized loss reaches winners. If the waterfall runs dry, the residual is spread across surviving open interest in that perp market through both cumulative funding rates, or across a spot market's depositors by cutting the deposit-interest index. Being right about direction is no exemption.
Staking is not a deposit. Capital in the fund is what pays these debts, so a staker's principal is what absorbs them. The staking page sets out the cooldown and how a draw during it reaches the staker.