PoolTogether: The No-Loss DeFi Lottery 🎫🤑

DeFi Reinvents the Lottery Model


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Table of Contents 🕹️

  1. Introduction

  2. The Lottery Through History

  3. Controversies

  4. Prize-linked Savings Accounts

  5. PoolTogether, The No-Loss DeFi Lottery

  6. D64 Games


The world is filled with unfortunate souls who didn't hear opportunity knock at the door, because they were down at the convenience store buying lottery tickets.

— Napoleon Hill


I. Introduction 👾

Gambling has been a part of human culture since history was first recorded. A rough estimate of total money legally wagered in the world is about $10 trillion. According to Encyclopedia Britannica:

The origin of gambling is considered to be divinatory: by casting marked sticks and other objects and interpreting the outcome, man sought knowledge of the future and the intentions of the gods. From this it was a very short step to betting on the outcome of the throws.

One of the most common forms of gambling is the lottery. In a lottery, money or prizes are distributed to a lucky winner via random draw, or “lot”. State-sanctioned or licensed large-scale private lotteries are common across the world, taking place in many African and Middle Eastern states, nearly all European and Latin American countries, Australia, Japan, several nations on the Asian mainland, and most U.S. states.

The state-sponsored lottery has been criticized, and rightly so, for the impact it has on a nation’s poorest. It is predatory insofar as it feeds on people’s desires to escape their present situation. Vested interests from the state means it is unlikely state lotteries are eventually dissolved, even though better solutions have been proposed.

Fortunately, decentralized finance (DeFi) offers a solution that is transparent, verifiably random, incentivizes saving rather than spending, and is done permissionlessly on-chain.

Enter the DeFi lottery primitive: PoolTogether.

II. The Lottery Through History 👾

The first recorded signs of a lottery are Keno slips from the Chinese Han Dynasty between 205 and 187 BC. As we will see, lotteries in history have been typically used to finance major government projects, and these first lottery artifacts are no exception. It is believed that they were used to finance the building of the Great Wall of China. The Chinese Book of Songs alludes to “the drawing of wood”, which appears to be in reference to drawing lots.

European lotteries began in the Roman Empire. Emperors such as Nero and Augustus, during Saturnalian feasts and other entertainments, would use lotteries to distribute gifts and slaves to their guests. Emperor Augustus also organized a lottery to finance repairs in the City of Rome. Winners received “articles of unequal value”.

It wasn’t until the 15th century when lotteries were recorded as offering tickets for sale with prizes in the form of money. Various towns implemented lotteries to raise money for fortifications and to provide for the poor, and by the 17th century, it was considered a common practice.

The modern lottery and the illegal numbers game can be traced to Milan, Italy in 1449. After the Golden Ambrosian Republic financed the war against the Republic of Venice via lottery, the city of Genoa began running a lotto based on players picking which Great Council members’ names would be drawn by chance every six months. The popularity of this lottery resulted in people wanting to gamble more often. To meet public demand, the Great Council candidates’ names were substituted with randomly drawn numbers.

After seeing the successful lotteries in Genoa, King Francis I of France organized one to help state finances. The Loterie Royale, held in 1539, was ultimately a disaster. Exorbitant ticket price resulted in full-scale opposition among the lower classes. This culminated in a ban on lotteries in France for the subsequent two centuries.

In England, the first official lottery took place in 1569 after Queen Elizabeth I chartered it earlier in the year 1566. It’s goal was to raise money for the "reparation of the havens and strength of the Realme, and towardes such other publique good workes". Everyone with a ticket was rewarded, and the total value equated to the total money raised. In other words, this was a 3-year interest free loan to the British government. This setup evolved in later years after the government began selling the lottery tickets to brokers, who would then use hired agents to sell them to the public. Because many people could not afford a whole ticket, brokers would sell shares.

In colonial America, lotteries played a significant role in financing public and private ventures. Its estimated that over 200 lotteries were sanctioned between 1744 and 1776 to finance roads, libraries, churches, colleges, canals, bridges, and more. The French and Indian Wars saw lotteries used to finance fortifications and the local militia. Benjamin Franklin and George Washington also used lottery financing; the former used the money to purchase cannons for Philadelphia while the latter managed a Slave Lottery in 1769 where land and slaves were prizes.

Within the US, after standard methods of finance and taxation were developed in the nineteenth century, lotteries were discarded as a funding tool. This was reinforced by problems related to fraud, along with reformers who drew attention to the social ills of pathological gambling. From 1895 to 1964, lotteries were prohibited following a scandal at the Louisiana Lottery in the 1870s related to bribery of state and federal officials. After the ban, the first state to introduce the lottery again was New Hampshire, intending to use funds to raise revenue for education.

III. Controversies 👾

Proponents of the modern day lottery claim that it is a relatively painless way of securing revenue for the government. Rather than raising taxes, governments can implement lotteries as a form of ‘voluntary’ tax. The ethics of government-sponsored excises aside, state-sponsored lotteries have more than a few issues. Using the US as an example:

  • On average, for every one dollar spent forty-seven cents are lost.

  • Poor people were 25 percent more likely to play for money, rather than fun, compared to the average.

  • Lottery play is most popular among laborers and less popular among those with advanced degrees.

  • Instant tickets in Texas were more likely to be purchased by a person who was out of work than someone who was employed or retired.

  • A 1994 study from Indiana University found that from 1983 to 1991 lottery sales tended to rise with unemployment rates. This is true in more modern times as well; for example, in 2008 during the peak of the recession 22 of the 42 states with lotteries had record sales.

  • Twenty percent of callers to the 1-800-GAMBLER national hotline had trouble controlling spending on state lottery tickets.

The list goes on. One thing is clear: low-income and less educated people spend a larger percentage of their incomes on lottery tickets than their wealthier counterparts. In this way, lotteries are a form of regressive taxation.

But why do people play? A study by Carnegie Mellon published in the Journal of Behavioral Decision Making found that playing stemmed from participants’ perceived relative wealth.

Some poor people see playing the lottery as their best opportunity for improving their financial situations, albeit wrongly so. The hope of getting out of poverty encourages people to continue to buy tickets, even though their chances of stumbling upon a life-changing windfall are nearly impossibly slim and buying lottery tickets in fact exacerbates the very poverty that purchasers are hoping to escape.

-Emily Haisley, the study’s lead author

Researchers in the study had participants complete a survey on their opinions of the city of Pittsburgh that included a question on their annual income. One group was asked to provide income on a scale that began at "less than $100,000" and went up in $100,000 increments, resulting in most respondents being placed in the lowest income category. The other group’s income scale began with "less than $10,000" and increased in $10,000 increments, leading most respondents to self-identify with the upper tiers. Afterwards, participants were paid a nominal amount and given the opportunity to buy up to 5 scratch-off tickets. The group made to feel poor ended up purchasing over twice the amount of tickets (1.27) compared with the second group (0.54).

IV. Prize-linked Savings Accounts 👾

To address the controversies surrounding lotteries, alternative vehicles have been proposed. One of these vehicles is known as the Prize-linked Savings Account (PLSA). PLSAs can help address two major problems: the lottery issues reviewed above and the issue of the under-funding of emergency savings. Some context for the latter: a 2015 Federal Reserve Board survey found that 46 percent of respondents reported they would have trouble coming up with $400 in an emergency.

PLSAs attempt to incentivize personal savings by linking bank deposits to a chance of winning money. This is done by pooling some of the interest payments that would have been made to the depositor and occasionally distributing the pool to random winners. PLSAs are very similar to lottery bonds, a type of government-issued bond in which randomly selected issues are redeemed at a higher value than par.

PLSAs have been shown to increase savings among non-savers. Research on the Save to Win program in Michigan showed that 56% of participants in the PLSA program did not save anything before starting the program.

So why aren’t PLSAs more common? The answer is simple: state-run lotteries have consistently claimed that PLSAs infringe upon their rights to generate revenue. For example, the First National Bank in South Africa began a PLSA program that was later disbanded after it was sued for infringing on the state’s monopoly. In the US, PLSAs are prohibited by some states as they are viewed as a lottery and, according to state laws, the only legal lottery is a state-run one. With billions of dollars of revenue on the line, widespread adoption of PLSAs remains unlikely.

The common goal of PLSAs is to increase the savings of the unbanked through a coordination mechanism that pools funds and distributes prizes, but with vested interests from centralized powers suppressing adoption a new kind of infrastructure is required.

Luckily, we have decentralized finance.

V. PoolTogether, The No-Loss DeFi Lottery 👾

Protocol Overview

PoolTogether is a decentralized protocol for no-loss prize games on Ethereum. The architecture is simple:

  1. Users deposit funds into a Prize Pool. They receive back "ticket" tokens.

  2. The total deposited funds from every user is pooled and deposited into a yield source (e.g. Compound) to earn interest.

  3. Each week (or whatever frequency set by the custom prize strategy), the total interest accrued from the yield source is distributed by the Prize Strategy as ticket tokens to randomly drawn winners.

  4. At anytime, users can withdraw their funds by redeeming their ticket tokens.

Since only the interest is used to pay winners, there is no loss of a user’s deposit. Players are able to participate in a lottery without giving up any of their money, similar to the prize-linked savings accounts discussed above. In addition, users do not need to claim their prize or deposit again each week. Instead, the deposited funds continue to participate until withdrawn and winnings are automatically sent to the winner’s wallet.

PoolTogether has awarded ~$2mm in prizes since its public release late last year. The total AUM deposited into the protocol currently stands at $208mm, resulting in $88k of prizes weekly.

Since the lottery is hosted on-chain, the random draw is verifiable. PoolTogether relies on Chainlink, a leading blockchain oracle, and their third party random number generator service. Odds of winning are calculated based on your pro-rata share of the total money deposited in the pool. For example, if 1,000 Dai is in the pool and you deposit 1 Dai, you will receive 1 ticket. Therefore, your chance of winning would be 1 in 1,000.

A Community Building Tool

PoolTogether allows any developer to build their own no-loss prize games that can be differentiated in a variety of ways. Developers can customize the yield source, the frequency and distribution of prizes, additional rewards offered to pool participants, supported asset types, and the fairness parameters. This means developers can create unique prize games for any asset. Let’s look at some examples of how this can be used to build communities.

In their docs, PoolTogether uses the example of an NFT Art Giveaway. In this example, an artist could require users to stake the artist’s social token in the pool. The artist then adds an NFT to the prize pool, which is randomly distributed to a lucky winner each week (or however often desired). In this way, demand for the social token is increased as users stake the token to participate in the giveaway.

New protocols seeking to incentivize liquidity on a decentralized exchange like Uniswap or Sushiswap could also use PoolTogether. The project could require LP tokens to be staked in the pool and in exchange users are rewarded with prizes. This improves protocol liquidity and offers another avenue in addition to yield-farming to reward liquidity providers. Theoretically, a new project could even use PoolTogether to initiate a fair launch of their governance token if they wished to distribute it in a lottery-like fashion.

But there is another feature of the PoolTogether prize pools that can enable community awareness that we haven’t discussed yet: the Loot Box. In addition to the interest prizes, first place winners also receive a Loot Box. Anyone can contribute any ERC20 or ERC721 to the Loot Box’s smart contract address. Therefore, communities, artists, and new projects can raise awareness of what they are doing by awarding prizes in the weekly games.

Some of the most interesting Loot Box awards thus far have included the first tokenized essay, Axies from the Play to Earn game Axie Infinity, a Genesis shirt from Saint Fame, and social tokens from Alex Masmej (the first individual to ever tokenize their future personal income stream).

Governance

Control of PoolTogether rests solely with holders of the POOL governance token. Anyone that holds 10,000 POOL tokens can submit a governance proposal to change the way PoolTogether is run. After putting up the proposal, token holders can vote on it for five days. Proposals pass if the majority of voters are in favor and a quorum of 100,000 votes is reached. A timelock, which is a way of preventing governance attacks, is in place for two days after a successful vote.

The community can submit proposals to do anything. However, it is likely governance would center around controlling the governance-managed prize pools by tweaking parameters such as number of winners, prize frequency, strategies, or launching entirely new pools. The community is also able to control future distributions of the POOL token, so governance could set up developer grants programs, modify the reward distributions, and implement referral rewards programs.

Risks and Concerns

Using PoolTogether is not without some risks though. As with any DeFi protocol, there is always the potential for smart contract exploits. A nefarious actor could potentially use a bug in the code to drain the smart contract of deposits. PoolTogether has attempted to minimize this risk by having two audits performed by Open Zeppelin and Quantstamp, leaders in the smart contract audit field. They also offer a bug bounty program with payments up to $25k for reported bugs. Additionally, since the code is open-source, anyone can review it making it stronger via transparency.

Another risk of PoolTogether is smart contract upgrade risk. Since PoolTogether’s contracts can be upgraded, the code could be changed maliciously. The code remains upgradeable in order to improve the protocol or fix a bug if one is found (this is a common practice in DeFi). In order to minimize this risk, a cold-storage multi-sig wallet on Gnosis Safe is used. This is considered a best practice.

Finally, it is important to note a common concern around the odds of winning. Since tickets are equal to deposit size, some users feel that this only benefits large depositors as their chances are significantly higher. While this is true, it is also important to note that these larger deposits contribute more interest to the prize pool and there is no guarantee that they actually win. In the history of winners, there are quite a few examples of this. For example, one winner had only deposited $73 and won the weekly prize of $43,760. It is also important to note that all depositors receive POOL tokens while they are in the pool earning an interest rate on funds regardless of if they win.

PoolTogether has taken steps to alleviate the concerns of smaller depositors. An expansion to Polygon took place this last week, which makes interacting with the protocol even cheaper (and the yields even higher thanks to the MATIC incentivization program Aave has implemented on L2). In addition, a Pods feature is currently in the works that allows people to group their deposits together for a higher chance of winning. The prize would then be split between members of the winning Pod.

VI. D64 Games 👾

What does the future of PoolTogether look like?

Tyler Scott Ward refers to our current state of DeFi as DeFi², a state where new projects are being built on top of base layer DeFi primitives. For example, PoolTogether is a protocol that operates on base layer lending primitives like Compound. Eventually, newer applications will be built on these DeFi² applications, resulting in derivatives on top of derivatives. Tyler refers to this as D64, the name coming from the result of squaring a square.

The future won’t only consist of protocols, it will also consist of the merging of technologies and protocols to build application interfaces that potentially use numerous protocols and numerous base layers to accomplish a goal. The outcome is simultaneous: a world where gaming, streaming, gambling, money management, finance, and entertainment is woven together in a fashion that utilizes amazing user experiences powered by base layer permissionless protocols.

-Tyler Scott Ward, Bond.Bet Plans

PoolTogether is a great example of a DeFi² protocol that can be integrated in D64 applications. Some potential ideas:

  • No Loss Slots: As discussed by Tyler in the Bond.Bet plans link above, users would deposit funds into a time locked pool, earning them tokens that can be used to spin a slot machine. The player’s principal would be unlocked weekly to either be placed back into the protocol to keep playing or withdrawn entirely. Winners would earn the interest earned on the the money locked in the staking contract.

  • Tokenized Sports Betting: Another one of Tyler’s Bond.Bet ideas, sports betting could be tokenized. It is likely that in the future, we could see athletes or teams tokenizing themselves so that people could invest in their contracts or success. In addition to the modified forms of fantasy sports this allows, no-loss bets could be wagered on sporting events. Interest gained from money locked in bets could fund the rewards of winning bets. Extending on this, imagine an eSports event where the ticket sale proceeds are placed in a PoolTogether prize pool and the interest earned is disbursed to random ticketholders or as a prize to the winning team or even as a prize for people that bet on the winning team.

  • New Subscription Models: Here you could deposit money into the pool of your favorite creator. The interest accrued is distributed to the creator while the principal remains with the depositor. Users can withdraw their subscription at anytime, receiving back their initial deposit. Integrating this idea with some of the current crowdfunding experiments (e.g. mirror.xyz and the tokenized essay) could be interesting. For example, a creative work could be crowdfunded by staking into a pool with 90% of the interest going to the creator and 10% plus the tokenized work going to a lucky winner.

  • No-Loss Charitable Giving: Users could deposit money into a pool and the interest accrued is donated to a selected charity. For example, GiveWell could sponsor a pool where users stake ERC20s and the interest is deposited into GiveWell’s wallet address. Gamifying the charitable giving experience (integrating a leaderboard or via the Aavegotchi model) could bolster public goods funding while providing no-loss entertainment value. If the ticket ERC20s are integrated into other DeFi protocols, one could effectively form a composable charitable giving stack.

There are a myriad of interesting opportunities for the PoolTogether model, and it is likely we haven’t even begun to scratch the surface of its potential when considering the concept of D64.

In the Metaverse, the merging of traditional concepts gives rise to entirely new structures. Sports, gambling, asset management, entertainment, identity, community, and more can all be gamified. Models like PoolTogether are just the initial wave of what will be a highly-integrated future.

So what are you waiting for? The pool is open.


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