The Insurance Fund
The Insurance Fund is a reserve inside the protocol, not an insurance policy. It stands in front of lenders for bad debt.
How it is funded
- Half of every protocol fee
- The protocol fee is 20% of gross premium (10% while the fund is at target); half goes to the fund and half to the treasury.
- Liquidation penalties
- What remains of every penalty after any cost of closing calls.
- Anyone can add to it
- The program lets anyone deposit USDC into the fund.
Its target
The fund targets 2% of the pool's value. While it holds at least that, the protocol fee drops from 20% to 10%, so lenders keep more of the premium. If it falls below target, the fee returns to 20% and the fund refills faster.
Illustration
in a $10m pool, the target is $200,000. In the normal week of the model on the Tranche Math page ($30,000 of premium, $6,000 of fees), the fund receives $3,000 a week from fees, plus any liquidation penalties.
How it is used
- It absorbs bad debt after a liquidation, before Junior.
- It covers the cost of closing calls during a liquidation once the borrower's penalty is used up.
- It does not top up Senior's 7% priority in weak periods.
- It pays no yield.
- It can only be spent by the program's loss rules. Changing that would need a program upgrade approved by the governance multisig.
Where to see it
The fund is an onchain account. Its balance can be checked at any time. See What You Can Verify Onchain.