Insurance

Insurance funds play a critical role in safeguarding the integrity and fairness of the Penals platform during liquidation events. These funds act as a protective buffer, ensuring that bankrupt traders do not incur further losses while guaranteeing that profitable traders receive their full profits.

Penals utilizes insurance funds to mitigate the need for Auto-Deleveraging (ADL) of traders' positions. The insurance funds pool consists of assets that are used to cover losses incurred during liquidation. The balance of the insurance funds can increase through successful liquidation orders executed at prices better than the bankruptcy price.

Here's how insurance funds work in the context of Penals:

1. When a trader's account equity falls to or below the maintenance margin, their account is liquidated. If the position cannot be successfully liquidated, the account is declared bankrupt, resulting in negative equity.

2. To address the losses and bring the account's equity back from negative to zero, Penals employs the Insurance Fund Protocol. This protocol takes over the unfilled positions and utilizes assets from the insurance funds pool to cover the losses.

3. In situations where the assets in the Penals insurance funds pool become depleted, and the Insurance Fund Protocol is unable to accept positions from the liquidation engine, auto-deleveraging (ADL) may be triggered. ADL is a mechanism that forcibly reduces the positions of profitable traders to offset the losses incurred by bankrupt traders.

By utilizing insurance funds, Penals ensures that bankrupt traders are protected from further losses while maintaining the integrity and stability of the platform. These funds serve as a backstop and contribute to the overall fairness of the Penals ecosystem.