The wonders of Decentralized Finance (DeFi) give creative developers an entirely new set of building blocks to experiment with. The aim of the DeFi movement is to create an entirely new, open-source, permissionless, and transparent financial service ecosystem.
DeFi is at such an early stage of maturity that entirely new types of applications burst into existence regularly. One of the early examples of this explosion is PoolTogether, a lottery built on Ethereum where no one can lose. How does it work, and how can you participate? Let’s find out.
What is PoolTogether?
In essence, PoolTogether is an Ethereum application that turns saving money into a game. It does this by combining the power of blockchain technology, smart contracts, and Decentralized Applications (Dapps). It is basically a savings game that gives you a potentially huge upside and minimal downside.
Players can join the game by buying saving tickets, each giving them a chance to win a prize. At the end of each week, a few winners get the pool prizes and their tickets back. What makes this game unique, however, is that players who don’t win also get their tickets back. Everyone involved keeps their money! To fund the prizes, PoolTogether uses the interest earned on purchased tickets. Let’s see how it works in more detail!
How does PoolTogether work?
Players deposit stablecoins or another crypto into a smart contract (the pool) to buy tickets. As of February 2021, there are 4 lottery pools: DAI, USDC, UNI, and COMP. Each ticket costs 1 token Each pool has a different prize based on the total value deposited by the players.
Each player can buy as many tickets as they want and withdraw their money at any point. The funds in the pool are sent to DeFi lending platform Compound Finance, where they accrue interest for a period (currently, one week).
At the end of the week, winners are chosen at random. The winning addresses get the interest earned by the pool and their tickets back. Non-winning addresses get their tickets back, and the game restarts. Everything is automated by smart contracts, so players don’t need to buy tickets again. As long as they don’t withdraw, they will be part of the lottery draws every week.
PoolTogether is often referred to as a no-loss lottery, and now we understand why – none of the players can ever lose their funds. The potential downsides of joining the game are the opportunity cost of not being able to use the money elsewhere and the transaction fees you’ll have to pay.
It’s also worth mentioning that the smart contracts that select the winner each week are completely automated. As the code is open-source, you can view it yourself on GitHub.
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How to use PoolTogether
Entering the game is quite simple. You will need a wallet that supports the accepted cryptocurrencies (DAI, USDC, UNI and COMP). For example, you can use MetaMask or Trust Wallet. You’ll also need some ether (ETH) to pay for gas fees.
1. Go to the PoolTogether app.
2. Connect your wallet. If you’re using Trust Wallet, choose the WalletConnect option.
3. Choose the pool you’d like to enter (DAI, USDC, UNI or COMP).
4. Click on Deposit, and enter the number of tickets you’d like to buy.
5. Confirm your purchase. Once the transaction goes through on the blockchain, you’re done!
As mentioned, once your tickets are in the pool, you don’t have to do anything else. Your tickets will automatically be eligible to win until you withdraw. If you win, your winnings are automatically converted to tickets, increasing your chances of winning again.
It’s important to note that when you buy a ticket, it isn’t eligible for the current prize, only for the next one. This is to prevent players from exploiting the game by buying a ticket right before an interest accrual period.
When you click on a pool, you can monitor the current size of the pool, the prize estimate, the number of tickets, and other handy statistics.
At the bottom of each pool page, you can also check the contract address by clicking “View pool on Etherscan”. The link will take you to an Ethereum block explorer where you can see the blockchain activity of that particular pool.
PoolTogether governance token (POOL)
In February 2021, PoolTogether launched its native token called POOL. The token was created solely to govern the PoolTogether protocol, which makes it a governance token. Any changes or updates made to the protocol will be proposed and voted on by POOL token holders.
As we can see in the POOL token contract, the max supply is set to 10,000,000 POOL. According to this PoolTogether blog post, the POOL token is being distributed to the community and contributors based on the following scheme:
14% to all depositors up until January 14th, 2021 (17,072 unique addresses).
12.44% to early core team contributors (locked for one year).
7.52% to PoolTogether Inc investors (locked for one year).
5% to a 14-week distribution to PoolTogether depositors (so that new users can get POOL governance tokens).
2.5% to onboarding and education of new users.
1% to addresses that voted in the first two snapshot governance votes AND held a PoolTogether deposit at the time of voting.
The initial distribution accounts for 42.46% of the total supply. The remaining 57.54% is currently in the POOL Token Treasury, which will be used and distributed according to the token holders' proposals.
How to claim your POOL airdrop tokens
As we’ve just seen, 14% of the total POOL supply was distributed to early PoolTogether depositors (including all three versions of the protocol V1, V2, and V3). This airdrop covered a total of 17,072 unique addresses.
Any user that deposited into PoolTogether up until January 14th 2021 (midnight UTC) can claim POOL tokens. The quantity depends on the deposit amount and duration.
Follow these simple steps to claim your POOL tokens:
1. Go to the PoolTogether App website.
2. Click on Account.
3. Connect your Wallet (we used MetaMask in this example).
4. On your wallet app, check the URL and click Connect.
5. Go to the POOL Claim page.
6. Read the instructions and click Next.
7. Insert the address you want to claim tokens for and click “Check claimable balance”.
8. Confirm the transaction in your wallet and wait for the network confirmations.
Note that you can claim tokens for addresses other than the one connected (as long as they are eligible). In other words, you can pay for the claiming transaction fees in case one of your eligible addresses doesn’t have enough ETH. However, the POOL tokens will be sent to the respective eligible address and not to the one that is claiming.
9. Congratulations! You have successfully claimed your POOL tokens.
The downsides of using PoolTogether
Favors big players
A counterargument against this game could be that statistically, it’s making the rich richer. By design, a player who buys 1000 tickets will always have a higher chance of winning than one who buys only 10 tickets. In this case, the “richer” player essentially leverages its advantage by earning interest on not just their own, but the “poorer” player’s funds. As such, players who never win ultimately would have been better off if they sent their funds to a lending platform themselves.
Still, the game mechanisms can always be improved based on token holders’ proposals and votes. For instance, the early version of the game featured only 1 winner per week, but the community voted for a change, and now the game has multiple winners per pool.
Another issue that users are currently facing is the high price paid for transaction fees. When the Ethereum network is too busy, transaction fees skyrocket. And they are particularly higher when making deposits or withdrawals on PoolTogether due to multiple smart contract interactions.
As of February 2021, there were no security issues on PoolTogether. According to the team, the smart contract powering the game has been audited by multiple independent auditing firms. Even so, it’s always worth considering that smart contracts are relatively new and experimental technology that is prone to bugs and vulnerabilities.
Locking your funds in a smart contract is always riskier than keeping them in your own wallet, for example. You are at your own responsibility when entering PoolTogether.
PoolTogether is a promising early example of what can be achieved with an open, permissionless financial system enabled by the power of blockchain. The idea of a lottery where even losing players get their entry price back is an entirely new concept that couldn’t exist otherwise.
Taking this idea further and bringing it to serve other types of use cases could also create compelling results. Locking up funds in an interest-earning pool could be useful for charity, crowdfunding, or other use cases that no one has thought of yet. The Decentralized Finance (DeFi) movement is just getting started, and PoolTogether is an early taste of the power that it can unleash.