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

# Principal protection

> How Thaler protects the deposit, what protection covers, and how to verify the reserve that backs the commitment.

## Commitment

The deposit principal sent to a Thaler vault is protected from loss caused by ordinary market variance. Specifically, the protocol commits to return at least the deposit amount, in SOL, on a normal close.

"Ordinary market variance" includes:

* Adverse moves in the price of SOL during the holding period.
* Funding-rate flips on the perpetual hedge that would otherwise erode the position.
* Borrow-rate spikes that compress the lending spread to zero or briefly invert it.
* Short-term liquidation pressure inside the policy buffer.

## Mechanism

Two mechanisms operate in series to deliver the commitment.

<Steps>
  <Step title="The immutable policy">
    The Squads policy extension constrains the strategy so that the worker cannot put the
    deposit into a position outside the protocol's risk budget. The leverage cap, the
    loan-to-value buffer, the venue allowlist, and the rebalance rules are all encoded in the
    policy. Nothing the worker emits can take the position past those bounds.
  </Step>

  <Step title="The protocol reserve">
    Thaler maintains a protocol reserve denominated in SOL. The reserve sits outside any
    individual vault and is sized to absorb residual variance across the active vault set.
    When a vault produces less than the deposit at close, the reserve tops the payout back to
    the deposit amount.
  </Step>
</Steps>

The policy is designed to prevent excursions large enough to consume the reserve under ordinary conditions. The reserve covers the tail where the policy alone is not sufficient.

## What protection does not cover

| Scenario                                      | Why it is excluded                                                                                                    |
| --------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |
| Smart-contract failure of a third-party venue | The protocol cannot underwrite the security of Kamino, the perpetual exchanges, or the liquid staking providers       |
| Loss of user keys                             | The protocol cannot recover a wallet the user no longer controls                                                      |
| User action outside the protocol              | Anything signed by the user with a malicious external application is outside scope                                    |
| Closure inside the penalty schedule           | The penalty is part of the contract the user accepts; closing after day 96 has no penalty and full protection applies |

The excluded cases are described in detail under [Risk disclosure](/security/risk-disclosure).

## Verifying the protection

<Steps>
  <Step title="Find the vault address">
    The Squads smart account address appears under the vault number on the My Vaults screen.
  </Step>

  <Step title="Open a block explorer">
    Paste the address into [Solscan](https://solscan.io) or
    [Solana Explorer](https://explorer.solana.com).
  </Step>

  <Step title="Read the policy extension">
    The policy lists the allowed programs, the leverage cap, the rebalance rules, and the
    closure procedure. The on-chain policy and the strategy summary in the app must agree
    exactly.
  </Step>

  <Step title="Locate the reserve">
    The protocol reserve is a dedicated public Squads vault. Its address is available on
    request via `audit@thaler.finance`. Both inflow and outflow are visible to anyone with a
    block explorer.
  </Step>
</Steps>

## Reserve sizing methodology

The reserve is sized against the worst observed annual outcome in the V12 walk-forward backtest across the supported venues. The protocol keeps a margin above the historical worst case so that an outlier year cannot exhaust the reserve.

The reserve grows with capacity. As more vaults open, additional capital is allocated to the reserve so the per-vault cover stays at least as conservative as the day-one ratio. The protocol publishes the reserve size and the vault count it backs in the analytics endpoints.

## Comparison with alternative postures

| Posture                   | What is fixed             | What is variable           | Where Thaler sits                |
| ------------------------- | ------------------------- | -------------------------- | -------------------------------- |
| Floating yield only       | None                      | Yield and principal        | Most yield protocols             |
| Capped fixed yield        | Yield                     | None (deposit anchored)    | Conservative structured products |
| Floor and floating upside | Yield floor and principal | Realised yield above floor | Thaler                           |

Thaler preserves the variable upside the strategy actually produces and anchors the principal plus a per-tier floor. The trade-off is built into the reserve sizing and the service fee.

## Next read

<Columns cols={2}>
  <Card title="Yield floor" icon="shield-check" href="/security/yield-floor">
    The minimum return commitment that sits on top of principal protection.
  </Card>

  <Card title="Risk disclosure" icon="triangle-exclamation" href="/security/risk-disclosure">
    The residual risks no on-chain policy can fully eliminate.
  </Card>
</Columns>