Potion were introduced with the Alchemy update in late 2011, potions have various uses ranging from increasing defense stats temporarily to adding on energy points. The recipes for potions are hidden until you either figure them out by mixing ingredients or by looking at a list of the recipes. Potions can help with many things, like some increase defense and attack greatly though temporarily. Other add to your energy and health.
To make potions, you have to mix and match ingredients. The recipes have to be discovered first before you can know what it is your making. In order to make the potions though, you have to have the needed ingredients. Otherwise you might just end up making the same potions over and over.