Potion Review – Enhancing Risk Management in DeFi

Since the day the world started talking about Decentralized Finance (DeFi), many people’s lives have changed. Today, managing investments and savings in a peer-to-peer (P2P) system is no longer a utopia.

In this context, Potion Labs proposes a new approach to autonomously managing investment risk based on Automatic Market Makers (AMM) deployed and managed by the community without Potion’s further intervention. In our review, we will talk about the main features of the Potion ecosystem impartially.

About Potion

Potion Protocol is a web3-native dApp that helps create automatic insurance markets where buyers and sellers come together and trade at mathematically sustainable prices. Each project offers different strategies to promote the adoption of DeFi tools on the market. Potion Protocol aims to promote a next-gen risk management plan for both sides of the market (buy and sell) as a public good.

For instance, you can buy Potion insurance on the price of Ethereum, locking a $3000 price. If the price of ETH went below $3000, for example, to $2500, the insurance would kick in with a $500 payout. All this with AMM and smart contracts on Ethereum and nice UX. You can also take the other side in Potion Protocol and be the one selling risk insurance (be a Liquidity Provider or LP). As an LP with Potion Protocol, you can take advantage of the Kelly Criterion to trade at optimal combinations of premium and utilization at all times, leading to long-term sustainable markets.

The following subsections provide more details on the approach proposed by Potion Labs. The buy-side Typically, an investor facing significant losses in the crypto market has various alternatives to protect their savings. Each chooses a different method between those who close their positions or move their liquidity to stablecoins, for example.

Potion Protocol proposes a next-gen tool for traders in the sector. Each investor can use a tailored put option (or its anagram “Potion”) to hedge the risk of their trades. Before using this financial instrument, one should know how a put option works.

After selecting a cryptocurrency on the Potion Protocol, a user can choose the strike price of the Potion. The strike price is, for simplicity, the price below which one would like to hedge a position. After selecting the strike price, one must choose the contract’s maturity date. The
last step is to determine the amount that a trader wishes to protect. Once again, we encourage the readers to study the way financial options work before proceeding with this powerful tool.

The sell-side

Those following the reasoning will have no particular difficulty understanding how the sell-side of this plan works. The protection, in this case, has a substantially specular nature with respect to the buy-side.

Once again, the user can design a tailored Potion using different parameters. This mechanism is clear to those familiar with the derivatives market. In this case, too, the user will choose the amount to protect, the maturity date, the strike price, etc., or copy Potions of other LPs.
The operation leads to the creation of a bonding curve. The contract variables can be adjusted and tested and simulated through Potion Analytics before committing any capital. The following section will provide some information on the subject.

Potion Analytics

Potion Analytics is a tool that helps the user to create and customize a Potion recipe based on simulations. In this context, we believe it is important to clarify three steps:

● Risk optimization: the Kelly Optimization Criterion is a technique in financial markets to reduce risk and increase the expected return. Potion Protocol uses this kind of approach.

● Sustainable Alpha: a good investment requires success rates to be higher than those of bankruptcy. Potion Analytics uses a Monte Carlo backtesting system to help achieve this goal.

● Programmable Alpha: having a sustainable alpha helps the investor in the short term, but what about the future? Again, Potion Analytics offers a backtesting layer to generate return and risk forecasts.

Discovering Potion Unlock

Potion NFT Unlock game is a new initiative that aims to provide a greater degree of decentralization in the DeFi ecosystem. This “aggressive decentralization” model derives from the clear separation between the R&D processes of a DeFi protocol and its deployment
and maintenance.

In other words, whoever researches and develops a protocol, under this model delivers its control from the very day of its release to the community interested in it. Potion Labs designed this step as described below:

● Potion Labs stores the protocol source code on IPFS with data encryption and a strong, long password.
● Potion Labs designed six types of non-fungible tokens (NFTs) or “rarities” that will be sold and distributed to the community.
● Each NFT holder will have a part of the password. Players can decide whether or not to disclose this information to other users, or how to incentivize each other to do so.
● If a sufficiently large number of users cooperate to share their pieces of the password, the community will obtain the access credentials to decrypt the Protocol’s file and release it to the public domain.
● At this point, the community (independently from PotionLabs) will have control over the source code and will be able to deploy it if they wish so.

Final thoughts

Many apparently decentralized systems typically maintain a certain level of centralization. Potion Labs proposes introducing a model of “aggressive decentralization”. The team brings its recipe to the DeFi sector with the groundbreaking features we described in the review.

As always, the market will evaluate the usefulness of this new tool. Many prominent players in DeFi such as Polychain, Placeholder, Pantera, Maven 11, The LAO, MetaCartelVentures, ParaFi, Spartan, Robert Leshner and Tarun Chitra, Fernando Martinelli, Synthetix founders, Crypto Plaza, Roble VC, CULTUR3, Lemniscap, Zee Prime, beToken Capital are already backing the project, and look forward to participate in the Potion NFT Unlock game.

A public auction of Potion NFTs is happening imminently. Whitelisting started on 14th February after a Community call. Auction live from 28th to 4th March for the Fellowship, Advanced and Legendary NFTs. Book the dates, we’re making history. After the sale the Potion NFT Unlock game should start with outcomes Potion Labs can only imagine.

Latest articles

Related articles