Potion Review: Protocol based on Kelly Criterion for Risk Management, and Potion NFT Unlock Game to release
Potion Protocol is a web3 dApp that assists in creating automated insurance marketplaces in which buyers and sellers meet and trade at mathematically sustainable prices. How it works is you can buy Potion insurance on the price of, for example, Ethereum, locking a specific price. If the price of Eth falls below that price, the insurance will pay out.
In Potion Protocol, you may also take the opposite side and sell risk insurance (be an LP). As an LP using Potion Protocol, you may use the Kelly Criterion to trade at optimal premium and utilization combinations at all times. Hence, this results in a mathematical expectation of long-term sustainable risk management markets.
Potion Protocol's goal is to make DeFi adoption easier by offering Automated Risk Management on-chain. As a result, the crypto market becomes more secure, with risk products that are safe and sustainable for buyers and sellers.
Moreover, Potion Unlock is a novel paradigm for aggressive decentralization. It establishes a sustainable model for developers of DeFi innovations to focus on software development, as opposed to compliance rabbit holes. Engineering and design of the protocol is separated from deployment and maintenance. With the development of the Potion suite completed, Potion Unlock puts the audited project in the hands of the community.
What Potion Holds?
Potion Analytics
Potion Labs set up a specialized data-science lab to put the Kelly Machine through its paces. Potion Analytics is a set of tools that allow for self-service, no-code back-testing of the Kelly Optimal bonding curves.
The first one is the Kelly Academy that allows users to familiarize with Kelly Criterion in general. It has simple coin toss examples for this purpose
Then, there is the Kelly Optimal Premiums which are the extension of Kello Criterion into the realm of pricing. Kelly vs Black-Sholes is another one. It is a benchmark comparison of Kelly vs BSM .
Next, we have the curve designer is an easy to use custom curve creator with multi-market backtesting. Lastly, we have the Multi-asset pools that allows for the testing of single-curve multi-asset pools.
Potion Unlock
Potion NFT Unlock is a game that encourages the Potion community to work together to release the Potion Protocol into the public domain. With this one-of-a-kind strategy based on “aggressive decentralization” from the start, Potion Labs seeks to avoid the dangers of a traditional project launch, such as a small number of users wielding significant power over a protocol.
Potion Labs has taken the complete Potion protocol coding for risk management of crypto-assets, Potion Analytics and supporting documentation as an encrypted file, to be deposited into IPFS. Following that, they split its password into thousands of pieces and generate private keys which are provided to the Potion NFT minters who can acquire them through a private sale, a public NFT auction, or via airdrops being performed to OG community members.
Kelly Criterion
The Kelly Criterion is a systematic risk allocation approach utilized by some of the world's most significant risk practitioners. It provides a mathematical framework for making optimal capital allocation decisions in the face of uncertainty.
It is especially significant in this context since it is optimized for survival and growth through repetitive, continuous risk exposure instead of opportunistic single event risk-taking. It is the exact situation the project is aiming for: LPs in an AMM constantly selling risk contracts to achieve steady long-term returns.
The Kelly Machine
The Kelly Machine is a groundbreaking DeFi system. It enables LPs and users to trade collateralized risk contracts, including insurance, puts, calls, and potentially even more complicated derivative products. It accomplishes this using a long-term mathematical expectation of capital growth due to built-in risk management that is automatically applied to all trades.
The premiums for these risk smart contracts are generated analytically from Kelly Criterion optimals. They may then be generalized to apply to any utilization-based pricing scheme.
Key features
Optimized for long-term capital preservation and growth throughout all market conditions: programmed to thrive in even the most volatile settings, such as crypto markets.
Capital efficiency: Capital may be exposed to numerous risks simultaneously. It allows LPs to achieve better utilization levels and purchasers access a more comprehensive range of goods in deeper markets.
Passive experience: LPs do not need to watch their positions continually. Bonding curves alter pricing dynamically to compensate for the risk.
Broad product selection: Capital may be used to underwrite a wide range of product configurations, with many distinct combinations of a strike price, term, asset, and so on.
Kelly Machine Vs Black-Scholes
Significantly less risky than Black-Scholes. There were discrepancies of up to 100% favour Kelly pricing, particularly for crypto assets.
The maximum draw-down is lower than in Black-Scholes. In many situations, Potion Protocol achieved median max drawdowns below 30%.
The long-term Alpha expectation is positive as a result of Kelly Optimal implementation.
Simple experience for LPs and users, making the Potion protocol accessible to everyone, not just the wealthy.
Allows the formation of a market equilibrium centered on Kelly Optimal pricing.
Potion Lab’s NFT-based Business Model
Potion Labs' business model is a hybrid of many emerging approaches being tested in web3. They want to generate an income by selling Potion NFTs, with pieces of password to decrypt the Protocol, and commemorating the launches of their R&D. As a result, they will produce profits that will support operational expenditures, pay off debts, and keep them working on fascinating DeFi research.
There are six types of Potion NFTs or “rarities”, the more decryption power they have and the less redundancy the better. The first is the Fellowship NFT, the most common NFT (2,600 units auctioned) which provides 6.64% percent decryption power with a redundancy of 100. Advanced NFTs (1,800 units) have a decryption power of 13.13% and a redundancy of 40, so users will have more clout than Fellowship NFT holders.
Legendary NFTs have a decryption power of 17.51% and a redundancy of 25. Potion is only auctioning 750 of these NFTs, but owning them provides users with legendary status over other players.
Original Gangsters (OGs) NFTs (2,850 units) are assigned to their founding members and have a decryption power of 12.77% with a redundancy of 114. Following that, Kelly Knight NFTs (522 units) were made available at Potion's private sale. These NFTs have a decryption power of 9.52 percent and redundancy of 2, implying that Kelly Knights holders will have a significant power.
Lastly, the Wise Wizard NFTs (1,478 units) were also offered during our private sale to key DeFi players, and hold a decryption power of 40.43% with a redundancy of 2 as well, also giving their holders significant decryption capability.
The public sale of Potion NFTs is happening imminently. Whitelisting is live, and the Dutch-style auction will be from 28th to 7th March for the Fellowship, Advanced and Legendary Potion NFTs. Book the dates, they’re making history! After the public sale, the Potion NFT Unlock game should start for players to collaborate on-chain to bring enough pieces of password together and decrypt the protocol’s codebase and release it to the public domain.
Potion's Future Goals
Potion Labs' first purpose is to provide a faultless NFT minting experience, while also having fun hosting the Potion Unlock game. It is a novel, revolutionary release method, and the team is eager to give the most excellent possible experience for everyone who contributes to the Potion Unlock open-ended game to potentially decrypt the Potion protocol and release it to the public domain with a sustainable business model for Potion Labs.
On the product front, they are thrilled about expiration-free, pay-as-you-go insurance and automated curve management, two enormous boulders for which they have great ideas and that are a natural next step for this initial release. Long term, Potion Labs dreams about an automatic tail risk hedger for asset portfolios, where one may keep their holdings in a black swan-secure way for a long time.
Final Thoughts
Beyond Potion Labs and its initial specific insurance application, the team feels it is beneficial to think and develop more trustless financial applications like the Potion Protocol. Cooperation among societal actors, like that of the Potion Unlock game to release the protocol’s codebase to the public domain, can yield enormous benefit from this dApp. The long-term effect potential for the development of public goods with a sound business model like that of Potion Labs is substantial.
Website: https://www.potion.fi