Protocol Vaults

Protocol vaults are system-level vaults managed by the GX Exchange protocol itself. They serve critical infrastructure functions: backstopping liquidations, absorbing bad debt, and funding protocol operations.

Insurance Fund

The insurance fund is the primary safety mechanism for the GX Exchange clearing system. It absorbs losses from liquidations where the closing price exceeds the bankrupt price, preventing socialized losses across traders.

How It Works

1. Funding — The insurance fund receives 20% of all trading fees collected on GX Exchange
2. Activation — When a liquidation results in negative equity (the position’s loss exceeds its collateral), the insurance fund covers the deficit
3. Growth — During normal market conditions, the fund accumulates steadily from trading fees
4. Depletion — During extreme market events, the fund may be drawn down significantly

Fund Sources

When the Insurance Fund Is Used

Normal Liquidation:
  Position equity > 0 after forced close
  -> Remaining equity transferred to insurance fund
  -> No losses to other traders

Bankrupt Liquidation:
  Position equity < 0 after forced close
  -> Insurance fund covers the negative equity
  -> Counter-parties receive their full settlement

Fund Exhaustion:
  Insurance fund balance = 0 and bankrupt liquidation occurs
  -> Auto-deleveraging (ADL) is triggered
  -> Most profitable opposing positions are partially closed
  -> ADL is a last-resort mechanism

Liquidation Backstop

The liquidation backstop vault is a secondary layer of protection that activates when the insurance fund is under stress.

Backstop Mechanics

The backstop ensures that the protocol can absorb multiple simultaneous liquidation events during high-volatility periods without triggering ADL.

Protocol Treasury

The protocol treasury receives 20% of all trading fees and is governed by GX token holders through on-chain governance.

Treasury Allocation

Governance

Treasury spending requires an on-chain governance proposal:

1. Proposer submits a spending request with amount, recipient, and purpose
2. 5-day voting period for staked GX holders
3. Requires 10% quorum and >50% approval
4. 24-hour timelock after approval
5. Funds are released automatically after timelock

Transparency

All protocol vault balances are publicly queryable:

Protocol vault transactions are recorded on GX Chain and are fully auditable by any participant.