Liquidation Cascades and How Pluang's Insurance Fund Protects Traders

A liquidation cascade is a chain reaction where a single sharp price move forces open positions to liquidate in quick succession, and each forced liquidation adds further selling or buying pressure that pushes the price toward the next batch of liquidation levels. Pluang's insurance fund exists specifically to absorb the gap between where a liquidated position closes and its bankruptcy price, so shortfalls from a cascade are covered by the fund rather than clawed back from traders holding profitable positions on the other side of the trade. The fund is built continuously from the margin buffer collected on every liquidation that closes with money left over, which is why its balance grows during calm markets and gets tested during volatile ones. Auto-deleveraging (ADL) only steps in if the fund itself cannot cover an extreme shortfall, and Pluang treats ADL as a backstop of last resort.

How Pluang's liquidation protection system works:

• How cascades form: When a large share of open positions sit on the same side of the market at similar leverage, a sudden adverse move pushes many accounts toward their liquidation price at once, and each forced liquidation adds pressure that pulls in the next batch of accounts.
• Liquidation vs. bankruptcy price: Your position is liquidated before reaching the bankruptcy price. The margin gap between these two prices is collected as a liquidation fee that flows into the insurance fund.
• Insurance fund role: The fund covers the shortfall when a position can't be closed at or above the bankruptcy price, so the gap isn't absorbed from other traders' profits.
• Auto-deleveraging (ADL): If the fund can't cover an extreme shortfall, Pluang may automatically reduce positions of the most profitable, highest-leverage counterparties — a rare, last-resort mechanism.
• Monitoring: Pluang publishes insurance fund data so traders can track whether the fund is growing, which signals the backstop is healthy.

Related questions:

Q: Will Pluang ever take profits from my account to cover another trader's losses?
Only as an absolute last resort through auto-deleveraging (ADL), and only once the insurance fund itself has been exhausted — this is rare, and only touches the most profitable, highest-leverage counterparties.

Q: How can I reduce my risk of being caught in a liquidation cascade?
Lower your leverage, keep margin comfortably above your liquidation price, and set a stop-loss before volatility hits — high-leverage positions sit closer to their liquidation price by design and are swept in first.

Q: Does Pluang use the mark price or the last traded price to trigger liquidations?
Pluang uses the mark price — a weighted average across major global exchanges — not the last traded price on a single order book, limiting how easily a brief spike adds to cascade pressure.

Q: What's the difference between a normal liquidation and a liquidation cascade?
A single liquidation affects one position; a cascade happens when many liquidations occur back-to-back because each one moves the price enough to trigger the next, most likely when a large share of open interest sits on the same side at similar leverage.