A technical breakthrough for DeFi liquidity providers: Introducing Potion Analytics

Potion Analytics, part of a community-driven project soon to be launched by PotionLabs, aims to protect LPs from the many risks lurking in decentralized finance. Most notably, it addresses one of the greatest drawbacks of existing price insurance solutions in DeFi: the severe risk in long-term liquidity supply exposing LPs to extreme capital losses. Furthermore, Potion Analytics and the associated Potion Protocol are accessible, open, web3-native and transparent.

Both will be open sourced into the public domain through a launch mechanism named Potion Unlock. This is an incredibly exciting and groundbreaking approach to decentralized software release which we recommend reading up on. Don’t delay however – the game begins on March 14th 2022 and given the excitement we’ve already seen building in the DeFi community, it’s likely to be a case of first come, first served.

The focus of this article will be on the power and opportunities that Potion Analytics can provide for liquidity providers. 

A risk management tool to address the current limitations in cryptocurrencies

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

According to the Potion whitepaper, even the best pricing models used until now usually lead to LPs losing their capital. Additionally, current risk management systems only provide a limited product selection. This means LPs 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 LPs lack 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. A decentralized order book allows each LP to specify their independent pricing, and 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.

To achieve this, Potion Labs has developed a unique bonding curve based on the Kelly Criterion, a mathematical framework to make optimal capital allocation decisions under uncertainty which has been shown to work in practice. Though the Kelly Criterion is used by some of the best risk practitioners in the world (including titans such as Taleb, Buffett, Simons, and Thorp), it could be considered risk management’s best-kept secret. Until now, models based on Black-Scholes have dominated the sector. 

With Potion’s Kelly Machine,  LPs can trade quickly and automatically while maximizing their survival and long-term expectation of capital growth. The decentralized system enables them to trade a wide variety of collateralized risk contracts including insurance, puts, calls, and other derivatives. 

LPs can select what “alpha” they want to expect and the risk profile they’re willing to accept. One of the primary advantages 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 sellers access a wider variety of products in deeper markets.

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.

Final Thoughts

Potion Protocol is a next-gen dApp for risk management that presents a unique approach to decentralized finance. It comes with Potion Analytics, a complex but accessible system of rewarding LPs. Furthermore, it uses an on-chain game called Potion Unlock to bootstrap a decentralized community interested in releasing the Potion Protocol’s codebase into the public domain.

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