Insurance fund

The intrinsic design of vAMMs entails specific costs, such as funding payments caused by the inherent imbalances in long/short ratios, expenses linked to price alignment operations, and absorbing unforeseen losses from liquidations.

Consequently, under extraordinary circumstances, the protocol fees may not completely cover these costs. For this reason, Butter.xyz has established an insurance fund system to act as a safety net, ensuring ample coverage for user collateral.

The insurance fund is implemented at two levels. First, each market maintains an operating fee pool and a reserve fee pool. Both pools grow over time as users trade on the exchange. Normal vAMM operating costs such as price adjustments and k adjustments spend from the operating fee pool. The reserve fee pool is an insurance fund for the market, and is only drawn down to cover losses.

Second, Butter.xyz maintains an exchange-wide insurance fund to serve as a backstop for all markets. This fund is supported by the Butter.xyz treasury, and only under extreme market conditions do we expect to draw from this fund.