Account Insolvency

Account Insolvency occurs when the value of a trader's debt exceeds the total value of their collateral, leaving the account with negative equity. This is the ultimate failure state for a leveraged account and a major risk for the exchange or lending protocol.

When an account becomes insolvent, the platform can no longer recover the full value of the loan from the user's collateral. This forces the protocol to use its insurance fund or other mitigation mechanisms to cover the loss, which can lead to system-wide instability.

Insolvency usually results from extreme, rapid market movements that outpace the liquidation engine's ability to sell collateral. It is a critical risk that protocols work to minimize through conservative margin requirements and high-speed liquidation mechanisms.

For the individual trader, it represents the total loss of capital and potential legal or debt recovery consequences.