The insurance fund is used to protect traders from bankruptcy in the event of liquidations, preventing their positions from being taken over by the auto-deleveraging system (ADL) when the positions cannot be closed at the bankruptcy price. The insurance fund mainly grows from liquidations that were executed at a price better than the bankruptcy price, and the fund's balance is disclosed to the public.

The insurance fund serves the following two purposes:

1. The fund covers the extra losses incurred in extreme cases where a position is liquidated at a price worse than the bankruptcy price; 
2. It minimizes the occurrence of auto-deleveraging of counterparty positions when a position is liquidated at a price worse than the bankruptcy price.

The balance of the insurance fund increases or decreases due to the following factors:

1. The insurance fund is initially funded by the platform;
2. The insurance fund receives money when a position is liquidated at a price better than the bankruptcy price; 
3. The insurance fund loses money when it is used to cover extra losses and the funding rates that a trader fails to pay due to liquidations executed at a price worse than the bankruptcy price.

After a position is taken over by the liquidation system, it will be closed at the bankruptcy price. The bankruptcy price is the price level at which a trader's losses equal their initial margin and their net asset is then reduced to 0.

• The remaining margin is added to the insurance fund if the position is closed at a price higher than the bankruptcy price.

For example, a trader opens a long position in BTCUSDTPERP and the margin is 200 USDT, with a liquidation price of 9,000 USDT and a bankruptcy price of 8,900 USDT. Once the mark price of the position hits 9,000 USDT, liquidation will be triggered. In this case, if the position is closed at a price higher than 8,900 USDT, the remaining margin after liquidation will be contributed to the insurance fund.

• On the other hand, if the final execution price is lower than the bankruptcy price, the insurance fund will be applied to cover the losses, protecting traders from negative equity.
• If the trading pair's insurance fund for each 8-hour interval is insufficient to cover the liquidation losses, the system will activate Auto-Deleveraging (ADL) and reduce counterparty's positions at the bankruptcy price of the position.

Sufficient insurance funds may reduce the occurrence of ADL. Traders may view Poloniex's insurance fund history here.