Socialized Losses happen when GRVT Insurance Fund goes into deficit due to large amounts of unprofitable liquidations. GRVT is built to minimize the probability of such an event but it can still happen. In this case, the exchange would have insufficient funds to meet withdrawal requests for all client funds.

During periods of insufficient capitalization, GRVT applies Socialized Loss charge to all withdrawals. Socialized Loss Haircut represents how much percentage each withdrawal will be charged at current point in time in order to offset the socialized loss. Only users who withdraw during those Insurance Fund deficit periods are affected by Socialized Losses.

Once the Insurance Fund is re-capitalized (through profitable liquidations or via fund transfer), GRVT stops applying Socialized Loss charge to withdrawals.

For a given trading account, Equity represents the USDT balance that this account would have if all its open positions were closed at current Mark Price:

Account Equity = Account USDT Balance + Account Unrealized PnL

Total Client Equity is the Sum of Account Equity for all client accounts

The Insurance Fund Loss is equal to:

Insurance Fund Deficit = Max(0, (-1) * Insurance Fund Equity)

i.e. Insurance Fund Loss is positive only if the Insurance Fund is bankrupt (i.e. Insurance Fund Equity <= 0 ) at current Mark prices. Otherwise it is zero.

If Insurance Fund Loss is positive (i.e. Insurance Fund has negative equity value), Socialized Loss Haircut is greater than 0 and all withdrawals will be penalized by this haircut.

Socialized Loss Haircut = Abs(Insurance Fund Deficit) / (Total Client Equity)

Only withdrawals are subject to socialized loss penalty, users who do not withdraw are not affected.

The Insurance Fund has initially 1,000 USDT balance and no open positions.

There are three traders on the exchange: Alice, Bob and Charlie. Each of them has a 1,000 USDT balance.

Therefore, the Total Exchange USDT Balance (including the Insurance Fund) is 4,000.

Alice buys 50 ABC-USDT Perp, while Bob goes short 50 ABC-USDT Perp, i.e. they trade against each other, at ABC-USDT entry price of 100 USDT.

The Mark Price of ABC-USDT-PERP drops to 40, and Alice’s position (+50) gets liquidated into the insurance fund. The insurance fund sells out of the position, but not fast enough.

It sold out of 30 at price of 20, suffering a realized loss of: 30*(20-40) = -600

The remaining 20 are now marked at 10 USDT, leaving the insurance fund with unrealized loss of: 20*(10-40) = -600

The Insurance Fund’s combined (unrealized + realized) loss is: -600 - 600 = - 1200

This combined loss of 1200 will leave the Insurance Fund with negative equity of: 1000 – 1200 = -200

The Socialized Loss Haircut is then equal to:

Insurance Fund Deficit / Total Equity = 200 / 4,000 = 5%

Charlie withdraws 500 USDT. The Insurance Fund receives: 5% * 500 = 25 USDT

and Charlie's withdrawal address receives: 95% * 500 = 475 USDT

The Mark Price of ABC-USDT Perp moves up to 30. Now the Insurance Fund’s remaining position (taken over from Alice) has:

20 * (30 - 40) = -200 USDT Unrealized PnL

This means that the Insurance Fund is not bankrupt anymore and has equity value of: 1000 – 600 – 200 + 25 = +225 USDT

This brings the Insurance Fund Deficit to 0 and the Socialized Loss Haircut to 0%. Therefore, any subsequent withdrawals will no longer be subject to any haircut.