Introduction
Drift’s Insurance Fund helps maintain solvency across the entire exchange by acting as a backstop for any bankruptcies. Bankruptcies occur whenever traders have outstanding liabilities but no further assets for liquidation. This can happen when perpetual contract traders get liquidated without sufficient collateral or borrowers default on their loans. The Insurance Fund steps in to prevent impact on the broader platform. Insurance Fund stakers provide liquidity to the fund and receive yield in return for taking on the risk.
How does it work?
There are separate Insurance Fund vaults for each asset that can be deposited on the platform—USDC, SOL, JTO, WIF, USDT, and more. Each individual vault will backstop positions associated with its respective asset. For example, USDC balances in the Insurance Fund will only cover USDC-denominated liabilities which encompass all the perpetual markets on Drift. Other assets such as SOL or JTO balances in the Insurance Fund will only cover their denominated liabilities which come from the borrow/lend product.
Users can deposit assets into these vaults to earn yield.
Note: There is a 13-day withdrawal period during which your deposited asset will not earn any yield. You can only have one pending unstake request per vault at a time.
Where does the yield come from?
Yield from each vault comes from a portion of the revenue generated by relevant activity on Drift. Stakers receive allocations in proportion to their stake.
Given that each asset is only covering for liabilities denominated in that particular asset, revenue is accrued accordingly as well. The USDC vault receives a portion of the revenue generated from perpetuals trading activity, as all trades are settled in USDC, hence fees are in USDC. Vaults for other assets receive a portion of the revenue generated from the borrow fees of each individual asset in Drift’s borrow/lend product.
Risks
- Smart Contract Risk: Each vault operates through a smart contract, which could have vulnerabilities or bugs that might be exploited by attackers. To alleviate this risk, all of our contracts are heavily audited by top firms in the space.
- Market Risk: In highly volatile markets, high number of liquidations could potentially occur. If fees earned are unable to cover the losses from backstopping bankruptcies, stakers will be affected. Their stakes will be used to cover the bankruptcies, leading to losses on their end. However, Drift’s risk engine has been designed to alleviate this issue and has held up well in past situations.
- Liquidity Risk: The 13-day withdrawal period means that assets are locked and not immediately liquid should you wish to withdraw them. This could impact your decision to deposit and the size of deposits.
Ready to get started?
You can view all Vaults here: https://app.drift.trade/earn/stake
