Insurance Fund
Learn how the Insurance Fund safeguards lenders by covering potential losses, how to participate and earn rewards, and the associated risks for users who deposit funds into the Insurance Fund
Last updated
Learn how the Insurance Fund safeguards lenders by covering potential losses, how to participate and earn rewards, and the associated risks for users who deposit funds into the Insurance Fund
Last updated
The Insurance Fund is a crucial component of the Gamma Options protocol, designed to protect users and the system from potential losses. By acting as a safeguard, the Insurance Fund ensures that when losses occur, they are covered immediately, maintaining the overall health of the platform.
Specifically, the Insurance Fund serves as a protective layer for lenders within the Margin Pool, preventing them from bearing the brunt of socialized losses. This means that instead of lenders absorbing the losses, the Insurance Fund steps in to cover them.
Any user can participate in the Insurance Fund. By depositing funds, users begin earning rewards proportional to their stake in the fund, though they also assume the risk of potentially losing some or all of their deposited funds.
Earnings from the Insurance Fund are closely tied to the performance of the Gamma Options platform. The rewards are distributed as follows:
10% of option trading fees, see: Fee distribution
41.6% of future trading fees
50% of account liquidation rewards
50% of LP position liquidation rewards
Although the margin system is designed to ensure that all debt is covered by collateral, there are two scenarios where losses can occur:
Delayed Account Liquidation: If an account's health falls below 100% and it isn't liquidated in time, losses can occur because the user's debt exceeds their assets.
Delayed LP Position Liquidation: If an LP position's health drops to 0% and isn't liquidated promptly, losses can occur if the LP position trades unfavorably. For more details, see: Trading risk
Rewards are dynamically collected with each trade or liquidation event. The Insurance Fund's balance is updated during these transactions, and insurers (users who have deposited funds) can withdraw their principal and rewards at any time.
Losses are detected by smart contracts whenever a user account or LP position is liquidated. During these events, the necessary funds are transferred from the Insurance Fund to the Margin Pool to cover the losses.
Since the Insurance Fund operates exclusively with USDC, any losses denominated in ETH will trigger a conversion process to ensure coverage.
It’s important to note that users participating in the Insurance Fund are incentivized to liquidate accounts and LP positions promptly; otherwise, their funds may be at risk.
Users can deposit USDC into the Insurance Fund from their wallets, thereby increasing the pool's liquidity. Depositing funds also increases the user's share in the Insurance Fund.
Users can withdraw their deposits to their wallets at any time. Withdrawing funds reduces the user's share in the Insurance Fund.