Insurance Fund

Insurance Fund (IF) Overview

Within the innovative ecosystem of decentralized finance, the D4X Insurance Fund (iFund) is a pivotal component that safeguards the protocol's stability and user assets. It's an ingenious solution designed to absorb the financial shocks of market tumult and undercollateralized liquidations. Let's explore the architecture and strategic significance of the iFund within D4X.

The iFund is set up to provide a financial backstop for the D4X protocol. It collects a small percentage from transaction fees and penalties, accruing value over time to cover any shortfalls that occur during the liquidation process.

It primarily covers risks when a trader's position is closed at an exchange rate lower than the default rate. This means that if a trader's capital turns negative at the time of closing their position, the IF steps in to manage the associated risks​​.

Functions of Insurance Fund

Accumulation of Profit

The IF's value increases through various means: commission income from the Automated Leverage Pool (ALP), interest payments from placing both IF resources and traders’ funds on External Lending Protocols (ELPs), and a portion of the ALP’s profits from credit activities related to leveraged trading positions​​.

Insurance for Delayed Liquidation

The IF provides coverage when the liquidation of a trader's position is executed at a rate lower than XRB. Initially, the IF covers risks at a level of 30% of XRB, compensating the platform's costs based on the exchange rate no lower than (1 − IF R) × XRB​​.

Profit Distribution to DAO

The IF receives commission income proportional to the volume and duration of closed deals on the platform. This revenue is then distributed accordingly, which includes contributions to the decentralized autonomous organization (DAO) governing the D4X platform​​.

Parameters of IF

The coverage level of IF (IF R) adjusts based on its value, which is evaluated at regular intervals. For instance, if the value of IF (V IF1) increases or decreases by 10%, the coverage level (IF R1) adjusts accordingly by the same percentage. The maximum coverage level can reach up to 100% of IF R​​.

Earning Mechanism of IF

The IF earns through interest on its own resources placed in ELPs, commissions from traders, a percentage of ALP’s lending profits, and its investment in leveraged trading positions.