Insurance Fund

The insurance fund is a pool of assets that OpenDelta maintains to prevent negative interest rates on their perpetual bond due to adverse events. There are two main events in which the insurance fund pays out. Those events are:

  • Negative Funding

  • Exchange Failure

Negative Funding

As we have seen in the Yield Mechanism section, the source of yield of the Perpetual Bond comes from the funding rate that perpetual swap positions accrue. However, this only happens if the funding rate is positive, which happens more often than not. Nevertheless, it is fairly common that there are extended periods where the funding rate is negative. In those cases, the position that is backing the Perpetual Bond has to pay interest to keep it open. Since this would lead to a negative interest rate on the Perpetual Bond, the insurance fund covers these interest payments in order to keep the principal value stable. Using current and historical data, our risk engine makes conservative assessments on the optimal capitalization of the insurance fund given the current TVL of the Perpetual Bond market.

Exchange Failure

History has show that no matter whether exchanges are centralized or decentralized, they are prone to hacks and failures. While our off-exchange settlement system prevents the loss of collateral in such an event, a failure of one of our hedging venues means that part of OpenDelta's Perpetual Bond liability will be temporarily uncovered. While OpenDelta's risk engine will try to immediately re-hedge its position on one of its other venues, any negative P&L accumulated in between off-exchange settlement periods will be covered by the insurance fund.

Insurance Fund Capitalization

The optimal size of the insurance fund is constantly re-evaluated and is determined by (but not limited to) the following factors:

  1. The total amount of OPB in circulation (TVL).

  2. Bitcoin Volatility

  3. General Market Conditions

OpenDelta will provide the initial funds to capitalize the insurance fund at an appropriate rate. After this initial capitalization, OpenDelta will take 50% of all positive funding generated and contribute it to the insurance fund. On an ongoing basis, insurance fund contributions will be adjusted periodically and the total insurance fund size will be kept at 30% of total TVL of the Perpetual Bond market.

Custody and Auditability

The insurance is held in an array of multisig wallets which are controlled by OpenDelta and an independent third party. All addresses associated with the insurance will be publicly available and periodical proof of funds will be conducted.

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