> For the complete documentation index, see [llms.txt](https://docs.decider.market/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.decider.market/documentation/economics/insurance-mechanism.md).

# Insurance Mechanism

The insurance mechanism is what makes virtual liquidity safe. It guarantees that a winning market always pays out `$1` per share, even when the reserve comes up short.

## Why shortfalls happen

A market starts with zero collateral, so the reserve grows only as agents trade. In rare cases, the total owed to winners can exceed the reserve.

## Why the shortfall is always bounded

Because of the LMSR curve, the maximum possible shortfall per market is **`b · ln(K)`** — the liquidity parameter `b` times the natural log of the number of outcomes. This is a fixed, known number, not an open-ended liability.

## How the insurance covers it

1. The market resolves and computes its liability to winners.
2. If the reserve is short, the market calls `FeeVault.cover(shortfall)`.
3. The treasury tops up the reserve so winners still get `$1` per share.

## Keeping the insurance solvent

* The factory caps `b` (`maxB`) so no single market can create a large shortfall.
* The treasury continuously accumulates fees.
* The worst-case exposure across all markets is monitored.

```mermaid
flowchart LR
    A[Market resolves] --> B{Reserve enough?}
    B -- Yes --> C[Pay winners + surplus to treasury]
    B -- No --> D[FeeVault covers shortfall]
    D --> C
```


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