We’re excited to announce the launch of our latest product — Insurance Fund Staking!
Stake Directly Into The Insurance Fund
With the launch of Insurance Fund Staking, traders can actively participate in the exchange's growth. Insurance fund stakers receive a portion of the revenue generated by Drift for contributing liquidity.
How Is The Insurance Fund Funded?
The Insurance Fund is funded through fees collected by the exchange in a variety of ways — including: borrow fees, spot exchange fees, perpetual swap fees, and liquidation fees.
These fees accumulate in the exchange's 'Revenue Pool'. Every hour, the funds accrued in the Revenue Pool are distributed between the exchange's Insurance Fund and its AMM.
This continuous hourly funding of the Insurance Fund generating real yield that collateralises the Insurance Fund and benefits stakers, through the adoption and usage of the exchange.
How Are Staker Rewards Calculated?
Users that elect to stake into the Insurance Fund receive rewards each hour for their contribution of liquidity. This occurs during the settlement of fees from the Revenue Pool into the Insurance Fund, with stakers receiving their proportionate amount of fees settled.
The total staked amount of received by each staker is calculated by: Total Staked Amount / Total Insurance Fund.
For instance, if a staker has:
- staked $10,000 into to the Insurance Fund, and
- the total Insurance Fund amounts to $500,000.
Then the staker's proportionate share is 2% ($10,000 / $500,000). As a result, the staker will receive 2% of the hourly settlement distributed to the Insurance Fund.
Read more about how staking rewards are calculated here.
As of a snapshot on 25 April 2023, the projected APY for Insurance Fund staking was 12.63%
Understanding The Risks Of Staking And The Purpose Of The Insurance Fund
It's essential to understand the risks associated with staking in the Insurance Fund.
The Insurance Fund acts as a safety net for the deposits and positions of users on the exchange. By staking into the Insurance Fund, users both:
- participate in the upside of the Insurance Fund via hourly funding; and
- participate in the risk of the Insurance Fund by backstopping levered losses and bankruptcies if they occur.
Bankruptcies And Levered Losses
Bankruptcies and levered losses occur when the market moves quickly, and users with loss leading positions do not have their margin liquidated in time to settle their debt. The platform is then left with a ‘levered loss’ and the user’s account is bankrupt (unable to pay outstanding debts).
In this instance, the Insurance Fund steps in to backstop the bankruptcy and makes protects the user on the other side of the trade.
This is a significant risk to Insurance Fund stakers as, in the event of a bankruptcy and levered less, a portion (or the entirety) of their staked funds may be used to settle the levered loss.
In the event of a user bankruptcy, the Insurance Fund is designed to cover the losses in full for bank balances and up to a market's maximum insurance limit, as well as any deficits in the AMM. Any losses beyond the maximum insurance limit will be handled through Drift's socialised loss mechanism.
Withdrawal Cool Down Period
In addition to these risks, there is a 14-day withdrawal cooldown period for unstaking assets from the Insurance Fund. Users must wait for the completion of this cooldown period before they can withdraw their unstaked funds. Funds in the process of being unstaked will:
- still be eligible for use in the event of a bankruptcy or levered loss; and
- not accrue yield during this period.
Read more about the Insurance Fund, the socialised loss mechanism and the cool down period here.
Visit app.drift.trade/earn/stake to stake into Drift’s Insurance Fund.