25th March 2021

Potion.Finance: a new decentralised model for pricing risk.

In this episode of the DeFi Download, Piers Ridyard explores risk management solutions in DeFi with Potion.Finance contributors Alfablok and Buendia.

Potion.Finance: a new decentralised model for pricing risk.

Potion is a risk management layer for DeFi, allowing people to manage the risk of their crypto in DeFi positions as well as the volatility that is inherent in the DeFi space.

Alfablok and Buendia take Piers on an expedition through the intricacies of risk-taking and risk management, proposed alternatives to the Modern Portfolio Theory, Nassim Taleb’s risk management theories, and applications of the Kelly criterion.

[00:00:46] Where did the inspiration for Potion.Finance come from and what is the purpose of its creation?

[00:01:52] An overview of Modern Portfolio Theory and its current place in traditional finance

[00:04:30] Limitations of the Modern Portfolio Theory

[00:08:38] The first steps in active risk management on DeFi

[00:10:32] Explanation of the terms “hedged positions” and “put options”

[00:15:44] Potion’s solution for making hedging accessible to people who are unfamiliar with the complexities of put options

[00:18:51] Addressing the two sides of put options: the buyer and the seller

[00:25:58] Potion’s simulation laboratory

[00:33:00] The Kelly criterion and how the Potion team implemented it into its protocol

[00:45:23] Creating an emergent pricing model based on the utilisation

[00:47:06] Conclusion: Does Potion provide an easy way for people to hedge, and does it generate option prices that people are willing to pay?

Further resources