Introducing Potentia

Potentia is a novel permission-less power derivative protocol that allows to take leveraged and non-liquidable positions on underlying assets.

Architecture

The core idea behind Potentia is to design a system that can operate as an Automated Market Maker(AMM) with asymptotic bonding power curves.

Components of Potentia

Potentia Smart Contracts consists of

1. Potentia Factory

Potentia Factory is the smart contract factory to deploy Potentia pools. Pool Operators(POs) can call the createPool on the PotentiaFactory.sol to deploy pools with any power $p$. Considering an example, a pool with selected underlying as WBTC and $p=4$, will deploy a Potentia Pool of ${\text{WBTC}}^4$.

2. Potentia Pools

Once deployed with a specific power $p$, a Potentia Pool tracks the price of the underlying asset. For example, a pool of ${\text{CRV}}^3$ will track the price of CRV asset. Traders can now open long/short positions on this pool, which translates to taking long/short positions on the derivative ${\text{CRV}}^3$.

3. PTokens

Unlike other derivative systems in which a position is represented by a unique one-to-one mapping between the trader and the newly opened position, Potentia Pools tracks the user positions through ERC20 tokens. This is in complete contrast to how CLOBs maintain and register a unique position. Every time a new position is opened, the specific pool's PTokens are minted. Each pool has 3 PTokens.

• LpPToken: When a Liquidity Provider(LP) adds liquidity, LpPTokens are minted and transferred to the LP.
• LongPToken: When a trader opens a long position, LongPTokens are minted and transferred to the trader.
• ShortPToken: When a trader opens a short position, ShortPTokens are minted and transferred to the trader.

NOTE

Each set of PTokens are specific to a pool, which means every pool has their own PTokens.

4. PriceFeed

Potentia Pools track the price of the underlying asset using Price Feeds. We incorporate Chainlink oracles to continuously track the market price of the asset.

Potentia pricing model

Potentia employs an alternative continuous funding mechanism designed for Automated Market Makers (AMMs). User positions gradually decay based on which side bears a greater liability to the liquidity reserve. If long holders have more valuable positions than short holders, they pay funding fees to both shorts and liquidity providers. Similarly, if short holders hold more value, they pay funding fees to longs and liquidity providers.

where LPV = Long Position Value and SPV = Short Position Value.

Unlike Central Limit Order Book(CLOBs), where funding is applied at fixed intervals of $8h,16h...$ etc, Potentia Pools apply funding every time there is an interaction with the pool. This simply means whenever any of the external function is called upon, i.e either liquidity is added/removed, or a position is opened/closed, funding would be applied over the pool.

Key differences

Look into the major differences b/w Potentia and other derivative systems.

	Other derivative mechanism	Potentia
Value	Most current mechanisms are basic call options that track the value of the underlying asset.	Potentia Pools are power derivatives i.e they allow to take positions on the power of the underlying asset.
Pricing	Traditional derivative pricing models rely on inaccurate estimates which often leads to volatility overestimations and over priced products.	Potentia uses a bonding curve mechanism to price derivatives. This eliminates the need to use the Black-Scholes model for pricing.
System type	Current systems mostly use a Central Limit Book Order(CLOB) which requires makers and takers to build a functioning derivative market.	Potentia is an Automated Market Maker(AMMs) which require Liquidity Providers(LPs) to pool liquidity but eliminates the need of Market Makers(MMs)
Position Type	In most systems, a position is unique and represented as a one-to-one mapping b/w the trader and the newly opened position.	Positions in Potentia are represented by fungible tokens. Every time a new position is opened, new tokens representing that particular position are minted. Hence, there are no discrete positions in Potentia. All positions are aggregated positions.