Risk Management in DeFi: coming soon to a metaverse near you?
Published in investing.com
Back in February we reported on PotionLabs’ $12 private sale of Potion Unlock NFTs. We can now announce that the broader public sale mentioned in the article is going live on March 14th 2022.
To prepare for the imminent launch, this article will take a look at the actual software that the Potion Unlock game is designed to release into the public domain. In particular, we will look at PotionLab’s promise to address one of the most pressing challenges in cryptocurrency investing: the high volatility in the market that can lead to long-term bankruptcy.
Why is crypto risk so difficult to manage?
Crypto markets are a lot more volatile than more traditional asset classes, meaning they experience wilder moves much more frequently. In the derivatives market, models based on Black-Scholes have traditionally been used to price risk. The problem is, when trusting the equation’s probabilities as fact, Black-Sholes prices crypto-risk risk too cheaply in some cases and too expensively in others, leading to bankruptcy for traders and liquidity providers (LPs). Why? Because Black-Scholes is focused on calculating a price for the derivative and not analyzing whether the bet is worth the risk.
What does the Potion Protocol do differently?
PotionLabs have developed a one-of-a-kind bonding curve, based on the Kelly Criterion, which prices insurance according to the LP’s risk. When used repeatedly over the long-term, this reduces risk and increases projected return. Essentially, the Potion Protocol turns a volatile market into a safe bet.
This is promising news for DeFi investors. Using the smart contracts provided by the protocol, LPs can exchange collateralized risk openly and transparently on-chain, with all of the transactions being managed automatically.
When will the Potion Protocol be available?
Unlike anything we’ve ever seen before in DeFi, PotionLabs have decided to open-source the protocol through a novel NFT game. 10,000 NFTs, each containing a fragment of a very long password, have been created to house the secret. NFT holders will have to collaborate to bring together the fragments and unlock the complete password. Once this is achieved, the entire protocol code and associated documentation will be available publicly.
This means you can’t use the protocol to start investing quite yet, but you can take part in the Potion Unlock game. To do this, you’ll first have to get whitelisted on the auction website.
Aside from being a compelling launch mechanism, this is also a smart move from PotionLabs. By releasing the software in this way, they avoid regulatory issues as well as the risk of putting too much power in the hands of a few. This is a project for the community, by the community — and could very well represent the new gold standard in DeFi.