DeFi in the docks as PoolTogether gets sued
Ethereum DeFi savings and lottery protocol PoolTogether has launched the Pooly NFT collection to help it fight back financially against an impending class action lawsuit. The suit by a former staff member of the notoriously anti-crypto US Senator Elizabeth Warren names the company and its investors. It seeks to determine who is legally responsible when a DeFi protocol is said to have harmed a user.
In October 2021, Joe Kent, a former employee for the fiercely anti-crypto US Senator Elizabeth Warren, issued a class action lawsuit against PoolTogether for violating New York state gambling laws. The suit against PoolTogether is viewed as a test case to change the landscape of DeFi regulation.
Now, PoolTogether launched the Pooly NFT collection and will use proceeds from the sale of the 10,110 NFTs to crowdfund their legal defense. Within two hours of its launch, the collection raised 73 ETH, or around $135,000, with a target goal of 769 ETH, or about $1.5 million, with more than three weeks left to mint.
Prices vary, and those wanting to show support for PoolTogether can get their hands on three levels of NFTs ranging from 0.1 ETH to 75 ETH. Purchasing the Pooly NFT is a way to support PoolTogether in defending against the class action lawsuit. What’s more, it’s interesting that NFTs are coming to the rescue as a crowdsourcing method that can actually give supporters something back for supporting a product they believe in.
Gravely concerned, or pushing an agenda?
In his complaint, Joe Kent is also described as being “gravely concerned that the cryptocurrency ecosystem – which requires enormous amounts of electricity – is accelerating climate change and allowing people to evade financial regulations and scam consumers.” This statement simply echoes the agenda spouted by his former employer, Senator Elizabeth Warren.
As mentioned above, it is widely thought that Joe Kent’s claim against PoolTogether is more about supporting his boss’s plan. As the claimant had only ever deposited the equivalent of $10 into the platform, he is not looking for some kind of retribution. Moreover, he seeks legal clarity by bringing PoolTogether into the spotlight and potentially creating a watershed moment for DeFi dapps and the broader ecosystem.
The suit names the Brooklyn-based corporation, PoolTogether, its founder, Leighton Cusack, and a host of the protocol’s investors, including Dragonfly Capital, Compound Labs, and Galaxy Digital Capital Management, as defendants. Individual investors in the project, including Stanislav Kulechov, the founder and CEO of DeFi platform Aave, are also named.
By naming the company and its investors, Kent’s suit aims to determine who is legally responsible when a DeFi protocol is said to have harmed a user. Depending on the case’s outcome, this could have enormous ramifications for decentralized projects – including decentralized exchanges and DAOs. Moreover, it will put most projects to the test regarding how decentralized they are.
What is PoolTogether?
Technically speaking, PoolTogether is a DeFi savings protocol with a twist. The dapp lets users deposit funds and enter a no-loss savings game where they can win prizes for depositing funds on the platform. More simply, it’s a blend of a lottery and crypto staking, with users sacrificing a smaller amount of potential yield in favor of a possible jackpot.
Users deposit cryptocurrency into pools to buy tickets, and each pool holds a weekly drawing that awards a prize pool to up to five winners. However, tickets do not expire following the draw. Instead, the tickets roll over to the next draw, the next one after that, until you win or withdraw your funds from the pool. In this way, it’s a no-loss lottery as you might not win, but you can’t lose.
Where do prizes come from?
PoolTogether takes the premise of crypto staking and operates it at scale, like a lottery. Firstly, when users deposit funds into pools, they are staked via the Compound DeFi platform to generate a percentage yield. The yield generated is then used to make the lottery rewards.
Staking rewards vary by which tokens are deposited, but with so many players continually pooling their funds long-term, it can add up to large jackpot sums. Additionally, automated smart contracts select the winners and keep other players enrolled in the latest weekly draws without any manual actions needed every week.
The idea put a twist on the traditional view of a lottery. Particularly the idea that participating in a lottery is an expensive habit with a meager chance of winning, where each week you spend but usually don’t win anything. With PoolTogether, users buy one valid ticket until they win or unstake.
In reality, it’s nothing more than a staking incentivization mechanic. The chance of winning the lottery is, of course, meager, however, it’s an added layer of attraction to the relatively mundane task of staking crypto for rewards. Furthermore, there are Ethereum transaction fees to pay to unstake from the platform, so most users will keep their tokens locked in the staking contract staked, avoid fees of about $20 and get a chance to win the lottery every week.
What’s the catch?
There are no apparent risks at writing, and players’ money is safely locked away in a smart contract. The smart contract is entirely automated, and the team behind the project claims that it also went through several independent smart contract audits by OpenZeppelin & Quantstamp. In terms of safety, it’s just the user and the smart contract.
Moreover, PoolTogether has been up and running successfully for a long time and is not classed as a high-risk dapp on DappRadar. However, as with all new technology, there are a few downsides to bear in mind. Namely, transaction fees can be costly due to demand on the Ethereum network, and if you’re only planning to put a few dollars into a pool, it might cost you more to pay the transaction fee. Maybe that’s what Joe Kent did?
Also, there’s the opportunity cost in locking your cryptocurrency into a pool as you could stake those funds or provide liquidity via a decentralized exchange to earn a yield. Instead, you’re pooling them in the hopes of winning a jackpot. Finally, the chance of winning grows the more tickets you buy, so one flaw is that it can potentially help the rich get richer. Still, anyone who plays can potentially win.
Uniswap, PoolTogether, who’s next?
Web3 and decentralized organizations are here to shake up the status quo and deliver more efficient, personable services to end-users. No industry is safe from disruption, and already dapps have infiltrated finance, music, social media, art, games, ticketing, point of sale, and logistics, with more use cases arriving.
In the areas of finance and gaming, the impact of dapps is already incredibly strong, and now, in what can only be described as a bear market, serious projects are preparing to get their heads down and build under the watch of new regulations and one eye on mass adoption.
Decentralized entities provide a specific set of challenges to lawmakers and regulators due to the decentralized manner in which they are built. Moreover, as Elon Musk rightly says, “regulation is very, very slow,” Generally, innovation moves far quicker than regulation.
Dapps provide a particular headache as they perform actions that can be carried out by several separate entities all from within one platform. So who’s to blame when it goes wrong? Is it PoolTogether for providing the platform? Or Compound for serving the yield. Maybe it’s neither, or both? Perhaps it’s the user’s fault entirely.
More importantly, dapps are finding their way into the hands of everyday people and not just crypto and blockchain advocates. These people rapidly need access to content and tools to help with their journey and are a significant reason DappRadar is building the World’s Dapp Store. The case of PoolTogether will bring major investors like Aave and significant operators such as Compound into a conversation about regulation and user safety. Arguably, both will support such a conversation, given that they are both long-term players in the space with the ambition to continue.
Earlier this month, leading decentralized exchange Uniswap came under fire as a new class-action complaint filed by a user claims that Uniswap Labs and its investors are responsible for her losses as a result of a breach of securities laws. The suit refers to bad actors who used the Uniswap protocol to execute pump and dump schemes, according to Nessa Risley of North Carolina, who points at a lack of know-your-customer (KYC) due diligence and failure to register with the Securities and Exchange Commission as major reasons for her complaint.
In a nutshell, investors took a risk and are now enlisting the help of the government because they got burnt and didn’t do any research. While this is a somewhat primitive standpoint, it is equally as plausible as the allegations raised in the complaint.
The outcomes of such cases could have severe implications for dapps in the future. The Wall Street Journal states that the PoolTogether lawsuit appears to be a deliberate effort to test some of the DeFi community’s core doctrines. PoolTogether says that while the allegations lack merit, a thorough defense is still needed. You can read the filed complaint here and PoolTogether Inc’s initial response here. Instructions to access all court documents are in the FAQ.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.