# Interactions with Potions

The Potions ecosystem is built around a series of interconnected actions that enable participants to generate yield, capitalize on arbitrage opportunities, and drive sustainable volatility. These actions -Wrapping, Unwrapping, Liquidity Provision, and Buy/Sell - play distinct roles within the ecosystem, benefiting the participants and maintaining its balance.

## **Wrapping**

Wrapping is the process of creating derivative assets (e.g. lYEL) by depositing original assets (e.g. YEL) as collateral.

When users wrap, they:

* Deposit original assets (e.g., YEL) into the Potion as collateral;
* Receive minted derivative assets (e.g., lYEL) in their wallet;
* Trigger an Enhancement Factor rebalance, ensuring the Potion remains 100% collateralized at all times.

Ecosystem Role:

* Wrapping increases the supply of derivative assets, facilitating arbitrage opportunities;
* A portion of the derivatives is redistributed as incentives to support ecosystem activity.

APR Generation: users who hold derivative assets (e.g., lYEL) earn Holder APR, which comes from the increasing backing ratio over time, making each derivative asset more valuable.

## Unwrapping

Unwrapping is the process of converting derivative assets (e.g., lYEL) back into their corresponding original assets (e.g., YEL), effectively removing the derivative tokens from circulation.

When users unwrap, they:

* Redeem their proportionate share of the original assets (e.g., YEL) based on the current enhancement factor;
* Burn their derivative assets (e.g., lYEL), reducing the total supply.

Ecosystem Role:

* Unwrapping reduces the supply of derivative assets, increasing the enhancement factor over time;
* It stabilizes the system by balancing the relationship between original assets and derivative assets.

APR Realization: By unwrapping derivative assets after reasonable time users realize their Holder APR, as each derivative token represents a larger share of the original collateral.

## **Liquidity Provision**

Liquidity Provision (LP) involves supplying assets to parallel liquidity pools, which support trading activity and enable arbitrage opportunities.

To participate, users:

* Pair their derivative assets (e.g., lYEL) with a predefined paired asset (e.g., USDC or another derivative asset, like lUSDC);
* Receive LP tokens (e.g., slYEL) representing their share of the liquidity pool;
* Stake their LP tokens to earn a portion of ecosystem fees.

Ecosystem Role:

* Liquidity providers ensure efficient trading and arbitrage execution within the ecosystem.
* LPs facilitate price discovery and support parallel liquidity pools, driving activity and volatility.

APR Generation: Liquidity providers earn LP APR, which comes from trading fees generated from buy/sell actions within parallel liquidity pools and a share of wrap fees redistributed to staked LPs.

## **Buy/Sell Actions**

Buy/sell actions occur within parallel liquidity pools and play a central role in supporting arbitrage opportunities. Users can buy or sell original/derivative assets in liquidity pools paired with stablecoins or other tokens. Trading fees are applied to every buy or sell transaction involving derivative assets.

Ecosystem Role:

* Driving volumes that sustain ecosystem activity;
* Buy/sell fees support generation of LP APR.

Arbitrage Opportunities Realization: Arbitrageurs can benefit from price differences between different assets.