Default waterfall

When a participant fails to meet an obligation, Indent Layer does not race to sell its position into the market. Loss is absorbed in a fixed order.

The order

1. Margin of the defaulting participant. Their own collateral goes first.
2. Their contribution to the default fund. Still their own money.
3. The protocol insurance layer. Capital set aside by the protocol itself.
4. The mutualised fund of the other members. Only here does anyone else's money move.
5. Auction. The position is auctioned to other clearing members.

The order is fixed in advance. It is not a policy that can be adjusted during a stress event, because a discretionary waterfall is not a waterfall.

Why the order matters more than the size

The useful question for a participant is not "what if a position blows up". It is "how many layers have to burn through before it reaches me". That number is knowable in advance, and it is what lets a clearing member size its exposure without knowing who else is in the book.

Liquidation as a last resort

Forced selling into a thin market turns one participant's failure into everybody's price event. Putting the auction last means the market sees the position only after four layers of capital have already failed to cover it.