> ## Documentation Index
> Fetch the complete documentation index at: https://docs.mithril.fyi/llms.txt
> Use this file to discover all available pages before exploring further.

# The Mechanism

> Insurance Cycles — How Mithril's Hedging Engine Transforms Prediction into Protection

<Note>
  Mithril's core innovation: **Liquidity Biasing**. We don't just create markets—we engineer them to make protection affordable.
</Note>

## Hedging Engine Architecture

Mithril leverages the **PNP Protocol** to deploy binary outcome prediction markets that function as decentralized insurance products. These markets use **bonding curve mechanics**—not peer-to-peer order books—ensuring guaranteed liquidity and mathematically-backed payouts.

<Info>
  **Why Bonding Curves?** Unlike traditional order books that require counterparties, bonding curves provide instant liquidity at any size. Buy or sell YES/NO shares anytime—the curve is always there.
</Info>

But Mithril goes further. We actively **bias the bonding curve** to favor hedgers.

```
┌─────────────────────────────────────────────────────────────┐
│              MITHRIL HEDGING ENGINE (PNP Protocol)          │
├─────────────────────────────────────────────────────────────┤
│                                                             │
│   ┌─────────────┐     ┌─────────────┐     ┌─────────────┐  │
│   │  BONDING    │     │   $MITH     │     │  CHEAP YES  │  │
│   │   CURVE     │◀────│  Treasury   │────▶│   HEDGES    │  │
│   │  LIQUIDITY  │     │  (NO Buys)  │     │  FOR USERS  │  │
│   └─────────────┘     └─────────────┘     └─────────────┘  │
│                                                             │
│   ┌─────────────┐     ┌─────────────┐     ┌─────────────┐  │
│   │   Creator   │────▶│  50% Fee    │────▶│   $MITH     │  │
│   │    Fees     │     │  Buyback    │     │   Demand    │  │
│   └─────────────┘     └─────────────┘     └─────────────┘  │
│                                                             │
└─────────────────────────────────────────────────────────────┘
```

***

## Insurance Cycles

### Cycle 1: Market Bootstrap

When Mithril creates an insurance market, the protocol **seeds it with liquidity** using \$MITH from the treasury:

<Steps>
  <Step title="Market Creation">
    A binary outcome market is deployed: *"Will \[Protocol] TVL drop by X%?"*
  </Step>

  <Step title="Treasury Allocation">
    2% of \$MITH token supply allocated to bootstrap initial liquidity across all genesis markets.
  </Step>

  <Step title="Liquidity Depth">
    Markets launch with sufficient depth for retail users to take meaningful positions immediately.
  </Step>
</Steps>

### Cycle 2: Liquidity Biasing

This is where Mithril's magic happens. The protocol **continuously buys the NO side** with \$MITH tokens:

<Info>
  **The Effect:** When protocol buys NO shares, the price of NO rises and YES falls. Users get cheaper hedges.
</Info>

| Action              | Market Impact       | User Benefit                |
| ------------------- | ------------------- | --------------------------- |
| Protocol buys NO    | NO price ↑          | YES becomes cheaper         |
| Cheap YES shares    | More users hedge    | Greater protection coverage |
| More trading volume | More fees generated | Sustainable ecosystem       |

### Cycle 3: Fee Recycling

**50% of all creator fees** are used to buy back \$MITH daily, creating a perpetual demand flywheel:

```
Trading Fees → 50% Buyback → $MITH Price Support → 
More NO Buying Power → Cheaper YES → More Users → More Fees
```

***

## How to Hedge (User Flow)

<Steps>
  <Step title="Browse Insurance Markets">
    Visit Mithril and explore available markets: Jupiter TVL, Kamino Health, Jito Staking, etc.
  </Step>

  <Step title="Assess Your Risk">
    Have exposure to Jupiter? Find the *"Jupiter TVL -50%"* market.
  </Step>

  <Step title="Buy YES Shares">
    Purchase YES tokens. If the event occurs, your shares pay out 1:1. If not, you lose your premium (the cost of protection).
  </Step>

  <Step title="Automatic Settlement">
    Markets resolve automatically via oracles. No claims, no paperwork. Payouts hit your wallet instantly.
  </Step>
</Steps>

***

## The \$MITH Tokenomics Engine

**\$MITH** is the cornerstone of Mithril's sustainability:

<CardGroup cols={2}>
  <Card title="Treasury Reserve" icon="vault">
    Protocol-controlled \$MITH funds NO-side buying, ensuring YES hedges stay affordable.
  </Card>

  <Card title="Liquidity Mining" icon="coins">
    Market makers and early hedgers earn \$MITH rewards, bootstrapping network effects.
  </Card>

  <Card title="Governance Power" icon="landmark">
    \$MITH holders vote on new market deployments, fee structures, and treasury allocations.
  </Card>

  <Card title="Value Accrual" icon="chart-line">
    Daily fee buybacks + protocol utility = sustainable demand for \$MITH.
  </Card>
</CardGroup>

***

## Why Bonding Curve Markets = Superior Insurance

<AccordionGroup>
  <Accordion title="Guaranteed Liquidity" icon="water">
    Bonding curves provide liquidity mathematically—no need to wait for counterparties. Buy or sell any amount, anytime.
  </Accordion>

  <Accordion title="No Counterparty Risk" icon="shield-check">
    Payouts are guaranteed by the bonding curve mechanics, not promises from an insurance company or opposing traders.
  </Accordion>

  <Accordion title="Price Discovery" icon="magnifying-glass-chart">
    The curve dynamically prices risk based on market demand—more accurate than any actuary, updated in real-time.
  </Accordion>

  <Accordion title="Instant Exit" icon="bolt">
    Sell your YES shares back to the curve anytime. No lock-ups, no surrender fees, no waiting for buyers.
  </Accordion>

  <Accordion title="Transparent Pricing" icon="eye">
    Premium = YES share price on the curve. No hidden fees, no complex calculations. What you see is what you pay.
  </Accordion>
</AccordionGroup>

***

## Next: The Roadmap

<CardGroup cols={3}>
  <Card title="Phase 1" icon="1" href="/protocol/phase-1">
    Genesis Markets: 5 flagship protocols
  </Card>

  <Card title="Phase 2" icon="2" href="/protocol/phase-2">
    Expansion: 10+ new markets
  </Card>

  <Card title="Phase 3" icon="3" href="/protocol/phase-3">
    The Future: Full ecosystem coverage
  </Card>
</CardGroup>