Pool Together: "No-Loss" Lotteries

This post was originally published on June 25, 2019, and sent to Messari Pro subscribers.

Every year, Americans spend $80 billion on a game they have almost no odds of winning, simply for the chance of a multi-million dollar payout. If it seems we’ve been overdue for a crypto lottery, now we’ve got one. Yesterday PoolTogether launched its new lottery system with a unique twist: they use Maker’s Dai stablecoin and DeFi money market platform Compound to allow users to buy tickets in its lottery, but get their money back in the event of a “loss.”

While this sounds like a scam, it’s possible to run a legitimate “no-loss” lottery thanks to the interest that accrues on the pooled assets prior to each drawing. Even when that interest (net of fees in PoolTogether’s case) is paid out to one lucky winner, everyone else can get the full cost of their ticket back! As PoolTogether tickets are sold, the proceeds are automatically lent out using Compound, whose Dai accounts currently yield a whopping 10% according to data from LoanScan. Traditional money markets accounts would yield a pittance using this type of scheme, but with the fledgling crypto lending markets, it’s much more compelling. As of the time of writing, there were over 1,800 tickets purchased with a prize pool of $165. That’s not a life changing amount of money, but it’s also…well…free. And based on the amount of crypto twitter buzz we saw on the project today, we’d expect this number to increase substantially in the weeks ahead.

Of course it’s only “free.” Not actually free. There are platform risks. Opportunity costs to tying up this capital. The cost of users’ time alone makes this a lot ROI investment. But that’s not why we play the lottery! It’s for the thrill. The game. Hypothetically, if you participate in PoolTogether’s lottery infinite times, you’ll expect to earn the same return you would if you’d instead simply lend out the Dai yourself. The reality is that the vast majority of players won’t ever win one of a finite number of lotteries. In fact, they’ll lose. They’ll miss out on compounding interest in the process.

But this sort of mechanism could go a long way towards “gamifying” savings and enticing more people to take advantage of the high lending rates that are currently available on these DeFi platforms. A side benefit would be that this would gradually make the fledgling DeFi lending markets more liquid and efficient and attract new users. PoolTogether has a nifty little business model where they can take a cut of the contract rake, without ever touching the assets themselves. (TBI Note: so are they in the regulatory clear? Curious to dig in on the legal side of this.) They caught a bit of heat for (at least initially) planning to keep their code closed source, but they reversed course on that earlier today.