What is the Insurance Fund?

Velocity’s Insurance Fund is the first backstop to maintaining the solvency of the exchange in the event of any bankruptcies. Any user can stake into one of Velocity’s per-market Insurance Funds (e.g. the quote-asset Insurance Fund) to accrue fees from Revenue Pool at the risk of resolving user bankruptcies / AMM deficits.

There is a separate Insurance Fund for each spot/collateral market that can be deposited on the platform. Since the quote asset’s pool collects exchange fees from trading activity on perpetual and (non-order-book) spot activity, that pool will support liquidations from perpetual trading, while each other market’s pool will backstop the respective asset-denominated liquidations from borrow-lend.

Anyone can provide passive liquidity by staking the corresponding asset into the Insurance Fund to further collateralise it in return for a portion of the liquidation and trading fees generated by the exchange.

The Insurance Fund is 100% staker-owned. Velocity removed the protocol-owned insurance-fund shares and IF-rebalance instructions that existed on Drift (admin_withdraw_from_insurance_fund_vault, transfer_protocol_if_shares_to_revenue_pool, IF-swap, and the IfRebalanceConfig / ProtocolIfSharesTransferConfig accounts no longer exist). Once a market has stakers, 100% of the revenue settled to a market’s insurance fund accrues to stakers as share-price appreciation — there is no protocol split. The one exception is a bootstrap backstop: before any user has staked into a market’s fund, settled revenue still seeds total_shares 1:1 so the fund isn’t empty, but those seed shares are permanent, non-withdrawable ballast, not a live protocol claim.

Why is the Insurance Fund necessary?

An Insurance Fund is necessary to protect against levered losses sustained by users of the protocol. When markets are particularly volatile, accounts with insufficient margin may not be liquidated in time or at their zero price.

In these instances, the balance of these accounts may fall below zero (i.e. they have more unrealised loss than available collateral margining the position) and the exchange is left to pay this ‘bad debt’.

The insurance fund exists as a safety net to resolve these bankruptcies. It offers a solvency buffer for the protocol and assures users that up to a certain amount of levered losses occurring (per market), there are enough funds to pay out profitable positions.

When is the Insurance Fund used?

The Insurance Fund is used to pay off liabilities when an account is bankrupt.

By default the Insurance Fund will pay out any bankruptcy losses:

up to the available balance of that market’s Insurance Fund for spot market balances, with any remaining shortfall covered by socialised loss; and
up to the perp market’s set max insurance limit.

Velocity Protocol has multiple asset pools. As a result:

Each market’s Insurance Fund balance will only cover liabilities denominated in that same asset. The quote/collateral market’s fund will cover all perpetual liquidations and is likely to be the biggest vault given that most exchange fees are collected in that asset and pooled within the same balance.
A given market’s Insurance Fund balance (e.g. SOL) will only cover liabilities denominated in that market’s asset, etc.

How is the Insurance Fund funded?

The Insurance Fund is funded entirely by stakers’ own contributions plus two revenue streams, with no protocol-owned share:

Revenue pool settlement — a capped share of trading, liquidation, and borrow fees collected in a spot market’s revenue pool settles into that market’s insurance fund vault periodically.
Lending-yield carveout — each spot market’s insuranceFund.ifFeeFactor (previously a combined totalFactor/userFactor split on Drift) carves out a fraction of that market’s deposit-interest gains directly to the insurance fund, rather than to depositors.

Since exchange fees are collected in the quote asset, they will be pooled in that market’s Insurance Fund, and in turn, that pool will backstop the allotted portion of bankruptcies in each perpetual market.

All excess losses (beyond the allotted limits) will be covered by the socialised loss mechanism.

What is Socialised Loss?

Socialised loss occurs where losses sustained on the platform are socialised across the deposits and/or positions of all users.

This only occurs when the levered losses sustained within the particular market are greater than the token balance of that market in the Insurance Fund; i.e. where deleveraging was not sufficient to ease the bad debt.

In that situation, the losses incurred will be socialised among participants:

Perpetual Traders: paid for pro-rata (by base amount) by all open positions
Lenders: paid pro-rata (by token amount) by all lenders.

Insurance coverage by contract tier

Velocity does not run a separate insurance vault per perpetual market. Every perpetual market draws on the shared insurance fund of its quote/collateral spot market (for example, perps quoted in the stablecoin spot market draw on that market’s insurance fund). How much a market may ever draw is capped by its contract tier:

Tiers A, B, and C have progressively lower insurance caps.
Speculative, Highly Speculative, and Isolated tier markets have an insurance cap of zero (INSURANCE_SPECULATIVE_MAX = 0). They receive no insurance-fund backstop at all — bad debt in these markets is resolved by the market’s own fee-pool clawback and then by socialised loss, never by the shared insurance fund.

This is the opposite of a dedicated per-market fund: the riskiest markets are walled out of insurance coverage so that their losses cannot drain the fund protecting safer markets.

Don’t confuse a market’s insurance cap with Isolated Pools — those confine collateral to a single pool. A market’s insurance cap instead limits how much that market can ever draw from the shared, per-collateral insurance fund (and for the riskiest tiers, that limit is zero).

How Perp Bankruptcy Resolution Works

Velocity follows a clear hierarchy for resolving perp market insolvency (resolve_perp_bankruptcy), gated by State.solvencyStatus rather than the general withdraw-pause flag:

In-transit insurance fees

The market’s own not-yet-swept pending_if_fee is canceled against the bankrupting loss first — both are just accounting claims on future pnl-pool inflows, so no tokens need to move.

External Insurance Fund

The Insurance Fund vault covers remaining debt, bounded by the market’s insurance-claim caps.

AMM fee-provision clawback

If the Insurance Fund is insufficient, the market claws back its own AMM fee provision — capped at the cumulative amount the AMM has ever received via the fee split (amm_protocol_fees_received), first the not-yet-tokenized portion, then tokens already swept into the AMM’s fee pool. The AMM’s own trading/spread capital beyond that provision is never touched.

Socialized loss

If all of the above are exhausted, socialized loss applies pro rata across all open positions within that market.

This structure ensures that insolvency events are handled fairly and predictably. The system aims to keep socialized losses as close to zero as possible. For the engine mechanics that determine when a position gets liquidated in the first place, see Liquidation Engine.