HOW A WIN-WIN CRYPTO LOTTERY RAISED $ 200 MILLION AND TURNED OUT
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HOW A WIN-WIN CRYPTO LOTTERY RAISED $ 200 MILLION AND TURNED OUT Arezzinskikh Jun 22·7 min read

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In September 2019, the PoolTogether cryptocurrency win-win lottery was launched. Its creators guaranteed that the player would not lose money. Almost a year and a half later, CoinDesk named the project a leader among hundreds of lotteries on the Ethereum blockchain. In June 2021, it was revealed that there is one major player with the highest chance of winning.

“I first came to the crypto industry by buying bitcoin in 2016. It was just as Trump was elected president. I then thought: “Everything will be bad in the world, there will be a lot of instability and unrest. In this case, it would be nice to buy bitcoins, ”said Leighton Cusack, co-founder of the PoolTogether project, in an interview with YouTube channel Show Me The Crypto in May 2021.

PoolTogether is a lottery game that runs on the Ethereum blockchain. The project is developing in the field of decentralized finance (DeFi), the fastest growing sector of the cryptocurrency market, which is not regulated by central banks and other financial institutions. The total amount people have invested in DeFi projects from May 2020 to May 2021 has grown from $ 694 million to $ 115 billion, according to Defi Llama.

There are hundreds of lotteries running on the Ethereum platform. They are often created by programmers at the beginning of their studies, says Dmitry Volkov, CTO of the international cryptoexchange CEX.IO. But Coindesk in mid-February 2021 named PoolTogether the leader among the win-win Ethereum lotteries.

After that, PoolTogether managed to almost double the amount of funds that users invested in the game. Now in the “lottery” fund $ 213 million, follows from the data of DeFi Llama.

Photo by André François McKenzie on Unsplash

How does the crypto lottery work?

Passion and risk without risk

Before getting into blockchain lotteries, Cusack was in a very different business. Together with partner Jason Burkholder in 2011, he founded the Kindrid cloud-based donation service for churches and non-profit organizations. In 2017, Burkholder and Cusack sold the business to Ministry Brands; the parties did not disclose the amount of the transaction. “I have more free time and money. Then, every day, I plunged deeper and deeper into the crypto industry, ”Cusack recalled in an interview with Show Me The Crypto.

In 2019, Cusack went to the ETH Denver hackathon alone. “This was my first cryptocurrency event and I didn’t know anyone, I really didn’t want to go and almost jumped off,” Cusack wrote on his Twitter. By that time, according to him, he had an idea for PoolTogether, which he spoke about at the hackathon. But then he did not even manage to get into the top twenty projects for consideration by the judges. But at the final event, he met other Canadian developers Chuck Bergeron and Brendan Asselstin. Together, they eventually became the co-founders of PoolTogether.

The idea Cusack, as he himself admitted, took from traditional finance. People love to play lotteries, and PoolTogether allows you to experience the fun of the game without risking your money. This lottery is not for people who have a lot of money, he said: “If you can invest $ 10 million in yield farming (platforms for obtaining cryptocurrency on credit or providing loans at interest. — Forbes), most likely, it will be more profitable for you to get it there. 10% of this amount. But if you have $ 10,000, it’s much more attractive to try your chance to win big. “

How it works?

PoolTogether runs weekly and daily draws. Now in the largest pool the prize is $ 55,078. There will be five winners, they will split $ 20,767, and one of them will become the “grand winner” and receive the remaining $ 34,311. He is chosen at random.

A lottery ticket costs 1 stablecoin, for example DAI or USDC, its price is pegged to the dollar and is approximately equal to $ 1. The more tickets a player buys, the more chances to win, there is no purchase limit. By purchasing tickets, the user will receive them in their crypto wallet. The luckiest player ever deposited $ 74 about a year ago and won $ 43,760, Cusack wrote on Twitter this April.

In each drawing, the amount of the prize fund is constantly changing, since at any time a new user can add money to the pool, and someone can take his money. If the user wants to constantly participate in the lottery, he does not need to buy tickets every week — already purchased tickets are automatically transferred to the next drawing until the user withdraws his money. Cusack calls this mechanism reserve.

According to him, in 2020 the size of the winnings from all pools averaged $ 300 per week, now about $ 200,000 per week.

PoolTogether invests the money received from the sale of lottery tickets in Compound Finance, a service for issuing loans on the blockchain. It allows you to “borrow” your cryptocurrency at a certain percentage. Compound rates change automatically based on supply and demand. A month ago, these were double-digit values, says Forbes director of business development Alfa Asset Management (Europe) S.A. Vadim Poghosyan. But now, he said, rates often fall below 5%. PoolTogether keeps the money collected at the drawing on the platform for a week, then takes the profit and pays out the winnings. Compound is considered one of the conservative tools in the DeFi market, says Dmitry Volkov.

In theory, anyone could invest directly in Compound Finance. But in the lottery, the player is counting on future return on investment, Volkov says. “A person invests $ 100 in a debt instrument for one week and intends to make a profit of $ 1 from this with a probability of 100%. But this does not suit him, and he wants to get more profit, albeit with high risks, that is, $ 100 with a probability of 1%. The PoolTogether lottery allows him to do this, ”he said.

The lottery creators cannot independently dispose of the collected cryptocurrency — any changes are agreed with the owners of Pool tokens, which the company released this spring and distributed among the lottery participants. Now ordinary clients have a little more than 80% of tokens, another 12.44% — from consultants and company employees, and the remaining 7.52% — from investors, says the PoolTogether blog. In February 2020, PoolTogether raised $ 1 million in the first round of funding. The largest American cryptoexchange Coinbase took part in it, investing $ 100,000, as well as IDEO CoLab Ventures, DTC Capital and ConsenSys Ventures.

Crisis of the main winner

Cusack has always emphasized that the lottery is a win-win, because all participants will receive their tickets back and can either collect the money or continue playing in the next draws. But in June of this year, the system crashed. It turned out that some participants have a higher chance of winning. A scandal erupted, which forced Cusack to make excuses.

On June 13, user banteg posted on Twitter a message: “Few people know, but we have strategies to win most of the lottery prizes. This has already led to the development of modules that allow pooling lottery tickets. ”

On the same day, Cusack acknowledged the problem in a series of response tweets. It turned out that by that time, Yearn, the DeFi platform, which allows you to put cryptocurrency on a deposit and make money on it, had already been in the game for several months. She became the beneficiary of many lotteries working with DAI stablecoins, including PoolTogether, as she was able to collect 57% of all issued DAI stablecoins — $ 27 million out of $ 47 million. For all other users, this meant only one thing: Yearn has the greatest chances of winning … “They monopolize the odds of winning and marginalize the core value of the protocol,” Cusack wrote.

A couple of days later, in an interview with CoinTelegraph, Cusack revealed that PoolTogether had already agreed that the company would use Yearn as another investment platform. Instead, Yearn — Cusack used a pun here — will not act “like a whale flopping into their pools” towards Pool Together. He also noted that Yearn now has 10% of all Pool tokens issued and the release of new tokens has decreased by 50% in the last month.

What are the other risks

Such lotteries primarily attract newcomers to the cryptoindustry who want to make a big profit with a big risk from their investments, Volkov said. “They may be attracted by the marketing slogan ‘win-win lottery’, and perhaps they just do not realize that they are risking their future profits,” he says.

PoolTogether is open source to any user. And among the risks there is a possible hacking of the system or a scam (fraud), Volkov continues. This has already happened with another crypto lottery SmartBillions — a hacker found a vulnerability in the application code, as a result of which he could constantly win the jackpot. He managed to win only twice, and after that the creators of the lottery unexpectedly withdrew all funds. It turned out that not just a mistake was made in the lottery code, but also deliberately the owners were left with the opportunity to withdraw all funds from the pool, recalls Volkov.

While yield farming projects like Compound pay high, often double-digit commissions, as the system develops, more participants will offer lower commissions, Poghosyan said. Then lottery yields will plummet and the industry will begin to restructure itself under the new rules, he says.