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

# How It Works

> The mental model behind SolHedge, in plain English.

## The Simple Version

Imagine you own two things: SOL and USDC. Normally, if SOL price crashes, you lose money just holding it. If you put it into a liquidity pool to earn fees, you can still lose money from volatility, sometimes even more, because of something called **Impermanent Loss (IL)**.

SolHedge puts your assets to work in a pool, then automatically manages a hedge on the other side. So when the market moves against you, the hedge cushions the blow. Meanwhile, you keep earning trading fees from the pool.

You deposit. You walk away. The AI handles everything else.

## Three Levels of Vigilance

Think of it like a shop with three alert levels. When it's calm, the shop stays fully open, chasing yield. When early warning signs appear, it partially protects itself. When real danger appears, it locks down and protects the capital.

The difference from a human doing this manually: the decision to move between these levels is automatic, driven by market signals the AI monitors continuously, not gut feeling.

<Steps>
  <Step title="Calm">
    Market conditions look healthy. Liquidity stays fully deployed, earning trading fees with no hedge active.
  </Step>

  <Step title="Caution">
    Early risk signals appear. The AI activates a partial hedge to reduce downside exposure while fees keep accruing.
  </Step>

  <Step title="Defensive">
    Multiple risk signals confirm together. The AI pulls liquidity back to stablecoins to protect capital fully until conditions stabilize.
  </Step>
</Steps>

<Note>
  Exact signal thresholds and detection logic are proprietary and are continuously tuned through live performance and backtesting. This page describes the philosophy, not the implementation.
</Note>

## Why It's Asymmetric

Moving into a more cautious mode happens quickly, because being late to protect a position is costly. Moving back to a calmer mode happens more conservatively, requiring sustained confirmation that the danger has actually passed.

The reasoning: reacting too early to a false alarm costs a little fee upside. Reacting too late to real danger costs real capital. So the system is deliberately biased toward caution.

## What Users Actually Experience

| Before SolHedge                   | After SolHedge                    |
| --------------------------------- | --------------------------------- |
| Manual range adjustment = stress  | AI adjusts range automatically    |
| IL eats into returns silently     | Hedge logic offsets IL            |
| Miss compounding if not watching  | Auto-compound runs 24/7           |
| Need to understand perps to hedge | One click; AI handles hedge logic |
| Volatility = fear                 | Volatility = more fees            |

<Info>
  Most of the time, SolHedge behaves like a normal, well-managed liquidity position. It only activates deeper protection during the rarer, high-risk moments that actually matter, the moments that would otherwise hurt the most.
</Info>