What is Insurance fund?

An insurance fund is the reserve a derivatives venue uses so that winning traders get paid when a losing trader’s collateral is not enough. A liquidation is meant to close a position while some margin is left; in a fast market the position can close at a price where the margin is already gone. The difference has to come from somewhere, and on most venues it comes from the insurance fund.

The fund is usually filled by liquidations themselves. When a position is liquidated at a better price than the point where its margin would hit zero, the margin left over goes to the fund instead of back to the trader. Calm markets add to it; violent ones draw it down. Large centralized exchanges publish their fund balances, and the size of the fund relative to open interest is one measure of how much stress a venue can take.

On-chain perp venues have built the same function into pools anyone can deposit in. On Hyperliquid there is no separate fund: the liquidator strategy inside HLP takes over positions in a backstop liquidation and keeps the remaining margin. On Lighter, the LLP doubles as the insurance fund and takes over positions in full liquidation. Depositors in those pools are, in effect, the insurers: they earn when takeovers end well and absorb the loss when one does not.

When the fund or pool cannot cover the gap, the venue moves to auto-deleveraging and closes profitable positions on the other side. For a trader, a well-funded insurance layer is what keeps that from happening often. For a depositor in HLP, it is part of what the yield pays for. TrueHold counts HLP deposits read from a Hyperliquid address next to the rest of the portfolio.