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Blockchain lottery sells bird NFTs for its legal defense

Crypto To NFT by Crypto To NFT
May 27, 2022
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The no-loss lottery, PoolTogether, launched a sale of NFTs yesterday to raise money for its legal defense in New York state against a class action suit brought by a crypto-critic software engineer.

Why it matters: It aims to test the question of whether or not creators can make something, release it on a blockchain and really claim not to control it anymore.

What’s going on: The complainant, Joseph Kent — a former staffer of the presidential campaign of Elizabeth Warren — bought tickets in the PoolTogether lottery in order to have standing to sue its creators, Compound (a lending platform and business partner) and investors for running what he contends is an illegal lottery. His suit was filed in January in New York State.

  • In his complaint, Kent’s attorneys write that he “is gravely concerned that the cryptocurrency ecosystem — which requires the use of enormous amounts of electricity — is accelerating climate change and allowing people to evade financial regulations and scam consumers.”
  • He’s asking for double attorneys fees and for everyone who put money into it to get double their money back.
  • Kent claims that while PoolTogether has turned control of the protocol over to holders of its POOL token, in truth, PoolTogether’s creators and its investors have enough POOL to control it anyway.

How it works: PoolTogether is a savings game that works sort of like a lottery, except everyone can get the money they put in back out at any time. Everyone’s deposits are used in DeFi protocols to earn interest, which serves as the lottery’s winnings.

  • In other words, users give up the interest on their own money for a chance to win the interest on everyone’s money.
  • It is currently awarding $7,180 in prizes each day, across various pools.
  • The website, it should be noted, is a way to access the protocol on Ethereum and Polygon (a sidechain of Ethereum), but if it went down, PoolTogether would still be accessible.
  • Similarly, if PoolTogether, Inc. shut down, PoolTogether would keep running.

Zooming out: PoolTogether, Inc., doesn’t make returns or profits off of the PoolTogether protocol. The actual game is in control of holders of the POOL token.

  • DeFi companies, like PoolTogether, Inc., have a different business model. They make a thing, make a governance token to control it, release the thing, distribute the token but then keep a portion of the token for themselves.
  • The theory here is that if the thing becomes popular enough, the value of the token will increase making all their work worthwhile.

This model is running into snags pragmatically, but it has worked well for some projects.

  • The POOL token launched in early 2021 at about $26. These days its trading around $1.

In a subsequent filing in the case, Kent’s attorneys, Charles Gerstein and Jamie Crooks, speak to the way DeFi protocols just don’t work the way normal people understand businesses working:

“The Defendants here either built the protocol, operate the protocol, collect the money, distribute the tickets, or are general partners in this shared enterprise. If none of them are liable, who would be? Defendants’ only answer is: no one. That cannot be right.”

Yes, but: Kent does raise a question that has always plagued DeFi — are claims of decentralization at all real? Governance tokens are usually distributed heavily to investors and founders, with another large portion going to users.

  • That said, lots of the users just sell them. It wouldn’t be hard for deep-pocketed investors to hoover them up.
  • It also wouldn’t be hard for them to hide how much they actually control.

Our thought bubble: PoolTogether really is about making saving money fun. Real gamblers love DeFi, but PoolTogether is not their pick.

  • That said, as Kent notes, there are similar products to PoolTogether in the market that offer better insurance against loss of principal.

What they’re saying: In their response to his complaint, PoolTogether’s attorneys at Paul Hastings write, “Plaintiff has admittedly attempted to manufacture standing by voluntarily inflicting ‘injury’ on himself by depositing cryptocurrency into the savings protocol, which he does not dispute he can withdraw.”

  • By his own account, Kent has about $12 at risk in PoolTogether (though he spent almost $400 in gas fees to make those deposits).

What we’re watching: PoolTogether, Inc. has argued that Kent already agreed to binding arbitration when he used its website.

The bottom line: As of this writing, sales of PoolTogether’s NFTs of a purple bird named “Pooly” have raised 192.4 ETH ($347,000) toward its 769 ETH goal.

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