Position Insolvency

Position Insolvency occurs when the losses on a leveraged position exceed the total value of the collateral backing that position. This creates a situation where the trader owes more to the protocol than they have deposited, potentially leading to bad debt.

In crypto derivatives, this is often mitigated by insurance funds or automated deleveraging mechanisms that rebalance the protocol. Preventing insolvency is the primary goal of the margin engine and the liquidation system.

When insolvency does occur, it can pose a significant threat to the protocol's stability and the funds of other participants, making it a critical risk to manage.