As much as I like the latter, my money's on the former.
If they add auto repair, I'd like to see it auto-take the correct material from one's inventory to self repair- rather than free infinite durability.
I'd personally like to see a sort of new durability system. Where you can repair some of your damage on the fly. You'd have repairable durability(I was gonna call it permanent damage but that sends the wrong message) and mendable durability.
Repairable durability; is like how durability works now, once it runs out the tool breaks and will need a trip to a tool bench to fix it up.
Mendable durability; can be repaired on the fly in your 2x2 crafting. It will be done via the use of relatively inexpensive whetstones that may or may not have a multiple use and could be tiered.
Essentially how I see the mechanic working is for every amount of mendable damage the tool will take some repairable damage. These factors will be determined by the materials used.
For example iron is a somewhat hard metal but is somewhat brittle and can chip. So it will have more durability but will be less mendable on the fly so evey 10 points of mendable damage accrued you'd take a point of repairable damage.
Bronze on the other hand is softer and as a consequence more malleable. It will have less durability but only take 1 repair damage per 20 mending damage.
If you let the mendable durability run out the tool becomes dull and hardly works, Like it was broken, but can be brought back if you use a Whetstone. Also maybe if you take the it to a toolbench you can fix the mendable damage for free.
This idea essentially gives your tool longer use but simulates a sort of maintaince aspect current TiCo just doesn't have.
In the context of auto repair it could possibly only regen this mendable damage but not affect the repair damage which would still accrue.
However I wouldn't make it as cheap as moss stone. Either it can be a gated/ expensive modifier or a tool part modifier. Maybe purple slime crystal used as a binder? Or if you really wanna be satan make it require some nether stars (piss poor balance mechanic but it can do the job requireing nether access making it mid game).
Tool rods could also mitigate the repair damage. Reinforced can be for negateing the chance if mendable damage. But tool rods could have a shock absorbing modifier that has a chance of negatieng the repair damage. You could even have a material that sends the shock through your player with a chance of hurting you rather then damageing the tool. That would be annoying as wood tool parts are now though.
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