Potion Insurance

#hackmoney2020_submit

Abstract

Potion is a decentralized protocol for the creation of price insurance contracts running on the Ethereum network. The protocol allows users to protect against price drops in any asset: BTC, MKR, Link, Gold, Tesla, etc.
Users can create policies with custom limits and term. Potion benefits from priceless oracling, and is built on UMA DeFi legos. The project is the result of our work during #hackmoney hackathon, from 0 to 1 in 30 days.
It is currently in early alpha release on a testnet, and can be played with at https://potion.finance.

The design philosophy we pursue is based on trust, user experience, and sustainable equilibria for all participants.

Why Potion?

During #hackmoney we wanted to build on existing DeFi lego to create a “perpetual hedging strategy”. We came across three key problems with existing protocols: unscalable liquidity architectures, limited market availability, and unreliable pricing.

We asked ourselves — could a reliable insurance AMM be built, that addressed those issues? In order to find out, we decided to try to build an experimental version of a general purpose DeFi Insurance writer.

Potion TL;DR

• Potion creates DeFi insurance policies against price drops
• If you buy BTC Potion 5000, you are protected against BTC price drops below 5000.
• You can chose any combination of asset, price cover, and term (eg. Mkr Potion 243, Gold Potion 1500, SP500 Potion 2500, etc)
• Potion has a kick-ass user interface and friendly user language

Functionality

• Protects users against price drops in any asset (BTC, ETH, Gold, Tesla).
• Insures the price of any asset, with any limit, with any expiration term.
• Users can exercise at any moment before expiry.
• Guaranteed exercise: collateral in escrow verifiable on-chain.

Protocol differentiators

• Deterministic insurance premiums, based on Black-Scholes Model.
• Single liquidity pool for all insurance written.
• Priceless operation with oracling based on UMA technology.

DeFi standards

• Permissionless No KYC or registration required.
• Non-custodial Direct control of assets.
• Decentralized Run on immutable distributed Ethereum technology.
• On-chain settlement of each option contract guaranteeing transparency.

Design system

The Potion concept uses the common metaphor of fantasy worlds to communicate complex concepts such as put options, premiums and liquidations.

What better metaphor than a healing potion to be able to explain an insurance on one’s assets?

Potion is a language system that helps humanize finance

Users cook their own potion recipes = custom insurance policies

The metaphor covers the entire user journey

You can read more about the Potion design system here.

Pricing

Potion uses an approach to pricing that seeks to find the fairest, most neutral pricing possible for both buyer and seller. It’s based off an industry standard: The Black-Scholes model.

System view of BSM

Potion uses a very unique approach to insurance pricing mechanics: it settles insurance premium price at the end of the contract. Blockchain architecture makes this operation trustless for the first time. UMA has a very convenient architecture to build from.

Benefits of deterministic pricing

• Better for the potion insurance seller (LPs): If unexpected volatility spikes take place, sellers will be compensated for it.
• Better for the potion insurance buyer: buyers should expect lower fees, since LPs are taking on lower risk.
• Better for robo-strategy engines: deterministic pricing allows for robust backtesting of robo strategies. Ideal for other DeFi legos to be built on top of, with back-tested robust pricing mechanics.

Using Black-Scholes “after the fact”, means both parties get fairest possible premium — we call this perfect pricing 👌.

You can read more about Black Scholes and our approach here.

Priceless oracling

Potion uses UMA’s priceless contract technology and its distributed human oracling solution. UMA uses clever game theory to minimize the number of times participants call the Oracle, saving both on-chain fees and time, and minimizing cheating.

General approach to price discovery on-chain

Priceless oracling benefits

• Lower fees: In most cases, the right price will be used, saving on-chain transaction costs, oracle calls and delays.
• Aligned incentives: Users are naturally incentivized to use correct pricing, or else they risk facing penalties, and losing money.
• Guaranteed dispute resolution: In case of disagreement, a neutral third party distributed human oracle will produce a price and settle the dispute

You can read more about the inner working of the system here.

Architecture

Here are the main actors involved with the protocol, and the roles they play

• LPs: They supply the liquidity that the protocol uses to collateralize put contracts. They receive premiums paid by users.
• Users: They buy potion contracts in exchange for premiums
• UMA DVM: Acts as a back-stop during price disputes, producing final pricing and settlement.
• Keeper bots: Monitor activity in the network, and dispute prices when they determine they are incorrect. They are compensated with rewards.

You can read more details about the transaction flow and mechanical operation of potion here.

Future steps

The project is at a very early stage, still in research status.
There are some significant dependencies that require further study:

• $UMA has to approve several price_identifiers <some of them complex>, before the project can go live.
• P&L for LPs needs to be studied although we have early positive signals.
• Extreme volatility scenarios have to be protocolized
• Gas usage needs to be optimized (currently $3 per insurance policy)
• Keeper bots are yet to be built/deployed

Work is far from done, but the team is fully energized about the potential of the project, and remain mind-blown about the birth of Potion.

Team

This submit was the result of a special human team unexpectedly coming together, that didn’t stop pushing until the very end. The last 60h of the hackathon were brutal, and the end result is a testament to the team’s commitment, and the magic that flourished between us during the process.

• Christian: UX and Design Systeme
• Guillem: Smart Contract Architecture and Development
• Fabien: Front-end development and design
• Jordi: Product and Financial Engineering

#hackmoney has been a complete success to us already in bringing us together. We are indebted to the organization and the entire DeFi community, who consistently nudged us in the right direction.

There is a certain energy and positive vibe in DeFi, that made this project possible.

Community love ❤️️

Special thank you to Nick Pai, Regina Cai and Allison Lu from UMA, for providing extensive support during our project, accommodating numerous questions, and validating our earliest designs. Thank you to Balancer for accommodating our earlier questions too, and spending time on our earlier perpetual design concepts.

And special thank you too to the hackmoney organizers and mentors, Heather and Josh most particularly, who provided a lot of support throughout the hackathon, especially helping us find team members for the project.

And finally thank you also to DeFi twitter (Stani 🙏 )who supported our open call for teammates on social media, and nudged the serendipity that made us find incredible talent for the team straight from the internet.
Can’t thank you enough.

Without all your support we wouldn’t have been able to get here.

Hackmoney submission video

Resources

Alpha release has been deployed on Ropsten for people to play with. Please bear in mind you’ll need to get fake DAI to send to the protocol

• Website: https://potion.finance
• Documentation: https://docs.potion.finance
• Fake DAI faucet: to play with system live: https://faucet.potion.finance
• Community Discord: https://discord.potion.finance