Injective Reiterates Insurance Fund to Protect Traders From Market Volatility

Injective offers a risk management solution through insurance for leveraged derivative trading on Equinox.

By
Chung Yee
on
September 11, 2021
Category:
Blockchain News

Risk Management Through Insurance 

Injective now offers Injective Insurance Funds, an innovative mechanism for users to stake their funds for protection against liquidations. The Insurance Fund also provides a unique reward system that incentivizes market-specific hedging strategies to underwriters. 

Injective offers a community-based solution to security. The Insurance Fund is created when independent underwriters underwrite the risk by staking the collateral token of the derivative market. The fund can grow or shrink depending on whether the funds are withdrawn to cover events of liquidation. 

“Insurance funds protect margin traders during liquidations which is especially important in volatile crypto derivatives markets. Staking into insurance funds also earns you rewards and helps you hedge!” tweeted Injective on September 8th.

Derivative leveraged trading is inherently risky, and this risk is magnified when the underlying asset is a crypto asset. The riskier the underlying asset, the greater the incentive to encourage underwriters to provide the collateral. If the asset price falls below the bankruptcy price, one where the value of the position becomes zero, the losing party may not be able to pay the winning party. 

Source: Injective insurance fund launches on Equinox for leveraged derivatives trading 

The insurance fund exists to cover such deficits. The insurance fund is necessary as it provides the community with a critical component of a fully decentralized exchange protocol. The recent flash crash on September 8 saw massive cascading liquidation across all exchanges for leveraged positions. The existence of an insurance fund would have saved millions. 


Participating in the Insurance Fund 

The community can participate by underwriting the risk of the insurance fund by staking collateral tokens. The step-by-step guide is provided below: 

1.  Connect your wallet to the staking dashboard.

2. Complete the signature request to access the staking dashboard. 

3. Transfer ERC-20 USDT tokens from Kovan to the Injective Chain. 

4. Navigate to the insurance fund page. 

5. Unlock the button on the stake page to approve the transfer. 

6. Confirm the transfer.

7. Head to the USDT Contract Address and click on ‘Write Contract’

8. Select the ‘Mint’ function and confirm the transaction 

9. Return to the staking dashboard and enter the desired USDT that you wish to stake.

10. Choose the Insurance Pool you wish to stake and click on the ‘Underwrite’ button. 

11. Key in the staking amount and confirm the transaction

Source: Injective offers a solution to hedge against risky trades through an innovative insurance protocol.

Redemption requests can be made from the pool that the user is actively underwriting. Redemption can be in part or in full. 

Derivative Leveraged Trading

Leveraged trading allows traders to pledge a certain amount of collateral to enter into positions that exceed the collateral value. The difference between the asset price and the liquidation price is the margin. If the asset price touches the liquidation price, the position is forcibly closed—this is a liquidation event. The bigger the size of leverage, the thinner the margin. 

Hedging Tool

The insurance fund is market-specific, and the underwriter can build strategies to hedge against a spot position taken. Alternatively, if the underwriter underwrites a ETH/USDC perpetual market, an ETH crash will earn the underwriter more USDC. This tool becomes a game-changer in hedging for the DeFi market.  

Source: Underwriters have to choose the insurance pool that they wish to stake.

Risk Management 

Risk management in trading is becoming common practice as traders incorporate various hedging strategies to guard against market volatility. This insurance fund plays a vital role both as a hedging mechanism or purely as a participant by staking for reward.  

What is Injective

Injective is the first cross-chain protocol built for decentralized finance applications. On the Injective exchange, anyone can access, create, and trade unlimited DeFi markets such as futures and perpetuals. Developers can also build cross-chain Ethereum-compatible projects that are lightning-fast and achieve instant transaction finality. Injective is backed by a prominent group of stakeholders including Binance, Pantera Capital, and Mark Cuban.

Find Injective at the following links:

Website | Telegram | Discord | Blog | Twitter | Youtube | LinkedIn | Reddit |

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Chung Yee

Chung Yee has a legal background and has been involved in research works for the legal and compliance industry. Writing is his passion, centered on topics such as the blockchain and finance.

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