# Perpetual insurance funds and auto-deleveraging: allocating a shortfall A derivatives insurance fund is a protocol or venue reserve used under its rules to absorb losses that remain after liquidation. It is not a personal insurance policy guaranteeing every trader’s balance. In the cited dYdX design, depletion can lead to auto-deleveraging, where selected opposing positions are reduced to offset underwater accounts. Evidence: [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core) Canonical: https://degreesofsatoshi.com/encyclopedia/insurance-funds-auto-deleveraging/ Published: 2026-10-02 Substantively modified: 2026-10-02 Independently verified by an automated reviewer: 2026-10-02T19:18:00.092Z Data current through: 2026-10-02 AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied. ## Key facts - **First backstop:** The documented fund absorbs negative-account losses before deleveraging. ([Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core)) - **Last resort:** Deleveraging can affect selected profitable, leveraged counterparties. ([Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core)) - **Scope:** dYdX distinguishes cross-market and isolated-market funds. ([Markets and margin parameters](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/markets)) ## Liquidation can finish too late Imagine a position crosses its liquidation threshold during a rapid move, but available execution leaves the account 40 quote units below zero. A fund can absorb that deficit according to its rules. Having triggered liquidation did not guarantee that the market could close the exposure before a shortfall formed. Evidence: [Liquidations on dYdX Chain](https://help.dydx.trade/en/articles/166991-liquidations-on-dydx-chain); [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core) ## An opposing position may be forcibly reduced If the relevant reserve is depleted, the cited design can select profitable, highly leveraged opposing accounts to offset underwater exposure. A trader can therefore have a position reduced despite having sufficient margin personally. A market hedge can change when one side is reduced. Evidence: [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core) ## Read the actual loss waterfall Other venues can use different priorities, eligibility rules or socialized-loss arrangements. Deribit’s settlement documentation, for example, discusses a pro-rata adjustment if its fund is insufficient. The word insurance does not standardize the reserve’s size, funding, beneficiaries or legal protection. Evidence: [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core); [Settlement](https://support.deribit.com/api/v2/help_center/en-us/articles/29734325712413.json) ## Questions ### Does a large insurance fund remove liquidation risk for my account? No. The backstop addresses residual system losses; an individual account still must meet its own margin rules. Evidence: [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core); [Liquidations on dYdX Chain](https://help.dydx.trade/en/articles/166991-liquidations-on-dydx-chain) ## Claims and scope ### insurance-funds-auto-deleveraging-quick-answer A derivatives insurance fund is a protocol or venue reserve used under its rules to absorb losses that remain after liquidation. It is not a personal insurance policy guaranteeing every trader’s balance. In the cited dYdX design, depletion can lead to auto-deleveraging, where selected opposing positions are reduced to offset underwater accounts. Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null} ### insurance-funds-auto-deleveraging-fact-first-backstop First backstop: The documented fund absorbs negative-account losses before deleveraging. Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null} ### insurance-funds-auto-deleveraging-fact-last-resort Last resort: Deleveraging can affect selected profitable, leveraged counterparties. Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null} ### insurance-funds-auto-deleveraging-fact-scope Scope: dYdX distinguishes cross-market and isolated-market funds. Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null} ## Sources - [Trading Core](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/trading-core) — dYdX Foundation. Backstop role and remaining-loss allocation. Locator: Insurance fund; liquidations config; deleveraging. Retrieved: 2026-10-02T18:53:21.133Z. - [Markets and margin parameters](https://docs.dydx.community/dydx/modules/governance/governance-adjustable-parameters/markets) — dYdX Foundation. Initial/maintenance margin definitions and cross versus isolated market scope. Locator: Liquidity tiers; Market types. Retrieved: 2026-10-02T18:53:21.108Z. - [Liquidations on dYdX Chain](https://help.dydx.trade/en/articles/166991-liquidations-on-dydx-chain) — dYdX Operations Services. Distinguishes eligibility, order execution and account losses. Locator: Margin; fillable price; liquidation. Retrieved: 2026-10-02T18:53:20.755Z. - [Settlement](https://support.deribit.com/api/v2/help_center/en-us/articles/29734325712413.json) — Deribit. Official support article retrieved through its public API; venue-specific mechanics. Locator: Daily settlement versus expiration. Retrieved: 2026-10-02T19:02:03.014Z. ## Revision history - 2026-10-02: First publication after primary-source research and separate automated verification. ## Cite this entry Degrees of Satoshi editorial project. “Perpetual insurance funds and auto-deleveraging: allocating a shortfall.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/insurance-funds-auto-deleveraging/