Potion Protocol Review – The Next-Generation AMM for Risk Management in DeFi

Iulian Lesanu

@Iulian

NFTPotion FiPotion Protocol

Potion Protocol is a community-driven project that aims to protect users from the many risks lurking in decentralized finance. It is accessible, open, web3-native and transparent. Furthermore, it aims to help users earn yields when selling insurance minimizing the risk of losing their assets.

Potion Labs is preparing to launch Potion Unlock shortly, an open-ended, on-chain social game that rewards players with the decryption and release to the public domain of the Potion protocol’s codebase and related documentation. It’s based on Potion NFTs, available for sale to those joining the growing Potion community and interested in releasing the Potion Protocol to the public domain.

In this Potion Protocol review, we look closer at one of the latest and groundbreaking projects dealing with risk management in DeFi. Read on to discover its features and how you can join it!

What is Potion Protocol?

Potion Protocol features a Web 3.0 decentralized application with smart contracts audited by ConsenSys. Its goal is to bring more stability to decentralized finance by offering users better asset protection. 

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The team behind this project believes that DeFi lacks one of the fundamental pillars of any financial system: risk management. They consider that the current risk management tools for cryptocurrencies struggle with limitations. Firstly, they pose an extreme risk in long-term liquidity supply. 

According to the Potion whitepaper, even the best pricing models used until now usually lead to liquidity providers losing their capital. Additionally, current risk management systems only provide a limited product selection. This means their users can only access very few products and remain hostage to non-scalable liquidity architectures.

Moreover, most existing services employ complex participation systems, which make them exclusive to a narrow financial community. As a result, many traders do not have access to essential risk management tools to protect themselves from the high price volatility in crypto markets.

Potion Protocol aims to change this status quo by democratizing risk management. The protocol provides users with more power and opportunities. For instance, it uses a decentralized order book approach allowing each LP to specify its independent pricing. Then, when a user contracts an insurance, Potion Protocol’s router automatically finds the best available price for their insurance combining the lowest LP offers in the network.

How Potion Protocol Works

Potion Labs has developed a unique bonding curve deriving from the original Kelly Criterion. Thanks to this innovation, LPs can trade quickly and automatically while maximizing their survival and long-term expectation of capital growth.

The Kelly Machine is a decentralized system enabling LPs and users to trade collateralized risk contracts. For instance, they can trade insurance, puts, calls, and potentially other derivative products. This system automatically applies built-in risk management to all trades and involves a long-term mathematical expectation of profits for LPs.

LPs can select what “alpha” they want to expect and the risk profile they’re willing to accept. One of the primary traits of the Potion protocol is long-term capital preservation and growth across market conditions. To achieve this, the protocol is optimized to survive even highly volatile, fat-tailed sectors like the crypto market.

Furthermore, Potion Protocol’s pioneering bonding curves and Automatic Market Makers (AMM) dynamically adjust pricing to offset risk. This means that LPs do not have to monitor their positions constantly. Instead, they can enjoy a passive experience, which helps both newbie and seasoned traders.

Lastly, participants can use their capital to underwrite many different product configurations: they can combine everything from strike, duration, and assets. All in all, the Potion protocol will help price insurance buyers access a wider variety of products in deeper markets.

Potion Analytics

Moreover, Potion Analytics will provide users and LPs with rich risk analytics and simulation tools. This feature represents an extensive suite of interactive tools for bonding curve analytics based on the Kelly Criterion. LPs can use it to design and cluster their own curves to reflect their unique risk/reward intentions. Also, they can back-test returns in any conditions before actually committing capital.

Potion Unlock

The Potion Protocol aims to grow and empower its community to create a better and safer environment in DeFi. Users can join the Potion community by acquiring Potion NFTs and playing the Potion Unlock, an on-chain social game aiming to release the Potion Protocol to the public domain while having a sustainable business model for the team and promoting decentralization. Potion Labs considers it an “aggressive decentralization approach that transfers full control of the project to the community from day 1.”

Potion Unlock game should happen, if the community wishes to participate, just after the public NFT auction live from February 28th March 4th 2022. The Potion NFT Unlock game should help the team avoid the usual drawbacks of many projects based on “progressive decentralization”; notably they wish to prevent a small number of users from gaining significant control over the protocol.

Potion NFTs

To create the Potion Unlock game, the team has uploaded the entire Potion Protocol codebase to IPFS as an encrypted file. Then, they broke its password into thousands of pieces provided to minters of the Potion NFTs, which consist of 6 types or rarities with varying decryption powers and redundancies. Lastly, they will distribute them to community members through private and public NFT sales and airdrops for OG community members.

Potion NFT acquirers can release the Potion Protocol open-source code and its features by playing the Potion Unlock game and decrypting the protocol’s files. The game features NFTs that hold a varying percentage of the secret code. For example, the larger the piece of the password an NFT contains, the larger its decryption power will be. 

Potion Unlock game will have 10,000 NFTs of 6 different rarity types available for minting. Acquirers of such Potion NFTs receive a part of the secret password when buying them, which they can obtain only via their private keys. This segment of the password becomes their weight in the Potion Unlock game.

Next, Potion NFT holders can choose to broadcast their secret segments to the network, as well as incentivize others to do the same. This brings the final reveal closer to completion. Furthermore, the NFTs (and their pieces of secret) have a built-in redundancy facilitating complete password reveal, even if some players never broadcast their secrets. The Potion Unlock game website will track and show the game’s overall progress, and once decrypted will release the Potion Protocol’s file to the public domain.

The 6 Potion NFT Rarities

The Potion Unlock game will feature 6 types of NFT rarities. Each of these types will have distinct values regarding decryption power, redundancy, and how many units of each NFT rarities they include. The more decryption power and the fewer units and redundancy the better for the player holding the NFT. Here are the six types:

Fellowship NFT

• The least rare NFT
• 6.64% power
• 100 redundancy
• 2,600 units

Advanced NFTs

• 13.13% power
• 40 redundancy
• 1,800 units

Legendary NFTs

• 17.51% power
• 25 redundancy
• 750 units

Original Gangster (OGs) NFTs

Available only for the Potion community’s original members

• 12.77% power
• 114 redundancy
• 2,850 units

Kelly Knights NFTs

Available during the private sale

• 9.52% power
• 2 redundancy
• 522 units

Wise Wizards NFTs

Available during the private sale

• 40.43% power
• 2 redundancy
• 1,478 units

How to Participate in Potion Unlock

Interested buyers can participate by using their MetaMask wallets on the Potion Unlock website. There, they have to complete a whitelisting process, which will start just after a Community Call on the project’s Twitch channel on February 14 2022 at 18h CET.

Once the public Potion NFT auction goes live, the community can purchase the NFT rarities. Their key is intransmissible so (besides Potion Labs) only the acquirers, after having cooperated to unite their pieces of password, can decrypt the Potion Protocol’s file and release it into the public domain. This collaboration among NFT acquirers will be done independently from Potion Labs, who is the developer of the Protocol but will not deploy or maintain it. After the decryption, the Potion protocol is in the hands of the community.

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Final Thoughts

Potion Protocol has a unique approach to risk management in decentralized finance. It comes with its own Kelly Machine and a complex but accessible system of rewarding LPs and other participants. Furthermore, it uses an on-chain game called Potion Unlock boasting NFT rarities. Its goal is to develop this next-gen dApp for risk management and bootstrap a decentralized community interested in releasing the Potion Protocol’s codebase into the public domain with a sustainable business model for Potion Labs.

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Potion Protocol is available on: Twitter | Discord | Github | Website