ZMO's Auto-Deleveraging & Insurance Fund Explained
ZMO's insurance fund helps fill liquidation orders when they can't execute at the bankruptcy price, protecting traders from negative equity and reducing auto-deleveraging (ADL) events.
LL
Lulu Liu
8 min
ZMO employs an insurance fund system to help winning traders realize their full profits and avoid being interrupted by the Auto-Deleveraging events (ADL).
The ADL mechanism protects losing traders by ensuring they will never incur a negative equity balance, meaning their margin balance will never become negative.
If the insurance fund has sufficient balance and a liquidation or partial liquidation order cannot be filled at the bankruptcy price, our insurance fund will be used to further lower/raise the order price by 1.0%. This function ensures liquidation orders can be executed on the open market and avoid the occurrence of an ADL event.
Conversely, if the order can be filled at a price better than the bankruptcy price, the surplus balance is deposited into the insurance fund.
The insurance fund balance can be used for liquidation price improvement and for user compensation in case of an extraordinary event. We have designed the insurance fund to ensure the continuous operation of the exchange.
* Note: If the order is not filled after making a 1% price improvement, the ADL mechanism is triggered automatically to flatten the liquidated position against a winning trader.
For your better understanding of the insurance fund system, please refer to the following example:
- Side: Short
- Entry Price: 8,000 USDT
- Leverage: 100x
- Contract Size: 100,000 contracts (800,000 USDT)
- Initial Margin: 8,000 USDT
- Liquidation Price: 8,040 USDT
- Bankruptcy Price: 8,080 USDT
When the mark price rises above the liquidation price, your position will be liquidated:
Your short position of 100,000 contracts will be closed immediately by the liquidation engine at the bankruptcy price, and your wallet balance will be wiped out.
The liquidation engine short covers the same amount of contracts by buying it on the open market:
If the buy liquidation order cannot be filled at the bankruptcy price (8,080 USDT), our insurance fund will be used to further improve the order price by up to 1% (8,160.8 USDT), in order to improve the chance of this order being filledIf the buy liquidation order can be filled at a price that is superior to the bankruptcy price (e.g. 8,060 USDT), the remaining margin (20 USDT) will be deposited into our insurance fund
If the buy liquidation order cannot be filled at the improved price (8,160.8 USDT), the system triggers the ADL mechanism at the bankruptcy price to protect the losing trader from incurring a negative equity balance.
