How PoolTogether is Reshaping the Lottery
Gamble the fun way – with your friends and without losing money.
Hey Web3ers! I hope you all had a great weekend. This week, I thought I’d discuss an exciting project within the crypto ecosystem. It’s about gambling 🎰 AKA how many Vegas references can I make in a single sentence. So, stack those chips✔️, throw it all on black✔️, and then let it ride✔️ cause in this newsletter we go big or go home✔️. The answer is apparently, four. Okay, let’s get to it!
What is PoolTogether?
PoolTogether is a unique app that enables a “no-loss” lottery.
The concept is relatively simple. Anyone can purchase a ticket for 1 Dai – an Ethereum stablecoin pegged at $1 – and at the end of the week, a winner is selected.
However, instead of receiving the funds from the lottery tickets – like your neighborhood gas station/traditional lottery – PoolTogether takes the money from ticket sales and allocates those funds into a borrowing/lending pool that earns interest. Each week, the winner of the lottery receives the combined interest of all the funds and all participants get their money back.
So, the only loss that lottery players experience is from not investing your money in something else that could earn a return (i.e bonds, stocks, etc).
Here’s a quick video about how it works, in case you’re more of a visual learner.
Now, if you're reading this newsletter, you probably know playing the lottery is statistically a terrible idea. Then again, you probably also like the sound of winning hundreds of millions of dollars which is why a large percentage of Americans still play the lottery.
What Makes PoolTogether Better Than The Existing System?
PoolTogether presents an opportunity to change the negative consequences that affect those who play the lottery. Since PoolTogether tickets are refunded at the end of each week, nobody loses their hard-earned money. This has the ability to benefit millions of individuals that addictively play the lottery.
The young crypto startup is using Ethereum for a worthwhile purpose. The company utilizes a smart contract to automate ticket purchases, investment allocation, lottery selection, and fund/reward processing without any third party involved.
This is meaningfully better than the existing lottery system which is broken on multiple fronts.
States receive less than a third of the actual revenue from lottery sales after the reward and admin costs are subtracted.
But once a state pays out the prize money and covers lottery administration costs, it’s left with less than you might think. Of the 43 states that had lotteries in 2012, 36 of them took in revenue that equaled less than a third of total lottery sales. - SmartAssets
The money that claims to go to education, ends up replacing existing education funding rather than supplementing the budget for better schools or increased wages for teachers. Politicians, government officials, and administrators essentially use the state lottery as an excuse to take funds away from the education budget.
"Money from the lottery generally substitutes money that would go to education anyway," said Patrick Pierce, a political science professor at St. Mary's College in Indiana. "After a few years, lottery money earmarked for education tends to find its way into a state's general revenue pool."
The lottery is hypocritically allowed to exist while the average lottery players aren’t able to invest in “risky” assets like startups and other types of securities available only to high net-worth individuals. I guess picking a winning lottery ticket is considered less risky than gambling on the next FANG company.
As an aside, Republic is a new company that enables non-accredited investors to invest in startups which is pretty interesting.
Realign State government incentives and motivations.
PoolTogether presents an interest opportunity to remove the financial loss for lottery participants. If such a mechanism eventually replaced the State lottery, it could significantly reduce administration costs, or even better, get the government out of the lottery business. Somehow it just doesn’t seem right that the government operates a business (the lottery) that is incentivized to prey on individuals by encouraging an addictive habit.
States encouraging citizens to gamble so that they can use those funds to replace the education funding for those same citizens' children is pretty messed up.
Diving Deeper into PoolTogether
Current Stats And Data Insights
The company has awarded $21,236 to-date since launching in December.
The highest prize ever won was $2,113, ironically the day after Black Thursday.
The estimated weekly prize is currently $316 but was consistently over $1,000 before Black Thursday/MakerDAO’s liquidity crisis.
The current lottery product has over 6k weekly players.
Obviously, PoolTogether or a similar company will need to get big enough before it is able to take market share from State lotteries. People play the lottery for the opportunity to earn life-changing money – two commas minimum (1,000,000).
Since the no-loss lottery format is relatively new, it has its own set of challenges. Currently, the main problem is that the largest pool, well, usually wins.
It’s a lot like Vegas, the House always wins. Except in this scenario, the House is the wealthiest person in the room. Actually, nevermind, it’s exactly like Vegas.
Sponsors for the Lottery
PoolTogether has enabled Sponsors to place money into the lottery pool in order to generate more interest. Sponsors are not eligible to win the prize but their capital helps increase the total interest generated. As you can see from the graph, Sponsors contribute a significant amount of the total capital in the lottery pool. This is a great idea and benefits users by ensuring that they can win more money without additional competition.
I pulled some data from Dune Analytics which shows the total deposits over time from both users and sponsors.
PoolTogether has experienced a relatively steady rate of deposits since it started which demonstrates a stable customer base.
PoolTogether’s Newest Feature
The crypto startup also recently launched a new feature called “Pods” which allows users to pool together (haha, get it) their tickets/funds and split the reward if they win. It’s a great concept for a few reasons.
There are currently single accounts that purchase 10k-30k worth of tickets each week and so the winner is almost always a high net worth account. Pods help address some of the issues with large whales winning all the time because now users can combine funds. This enables a large group of individuals to more easily beat individual ticket holders.
Pods enable trustless collaboration between friends, family, or strangers because the smart contract will automatically distribute the reward evenly. There’s no need to trust cousin/uncle Vinny to share the reward before he skips town.
Pods may lead to new incentivized behavior and grow the PoolTogether lottery. For example, with Pods, even large amounts of anonymous individuals can pool their resources together in order to win. There may be some interesting dynamics such as people who invest in multiple pools to increase their chances of winning or vise-versa – individuals who invest in one pooled group so that they can win a larger portion of the reward.
Final Thoughts
PoolTogether is creating a lottery with better incentives. It’s possible that one-day lotteries that take an individual’s money and don’t return it may become illegal, although that’s more of a personal fantasy than a certainty.
More interestingly, while PoolTogether currently allocates the capital to Compound, one-day the capital could be invested in various types of assets like stocks, bonds, or lower risk index funds.
The length of the lottery could also extend to months, years, or decades.
Imagine a decade long lottery that invested 10% of the funds into the S&P 500 and then paid out the returns to a lucky individual while giving everyone else their original deposit back.
A no-loss lottery is a unique model that is only possible using blockchain technology. I’m excited for more ideas like this that are able to enable better incentive mechanisms and business models that produce systemic change.
Until next week,
Mason
Recommended Reads
Who Pays for this? by Morgan Housel
Oil and Markets by Jamie Catherwood
Libra 2.0 in 5 Minutes by Messari
Advancing Web 3.0 is a weekly(ish) newsletter about cryptocurrencies, decentralized finance (DeFi), and technologies that are shaping the next era of the Internet. Welcome to the bleeding edge. Welcome to Web 3.
About the Author: I’m Mason Nystrom, a writer and aspiring angel investor. Previously I worked for ConsenSys as a marketer focused on marketing strategy for ConsenSys and its portfolio companies. Prior to joining ConsenSys, I worked as a Business Analyst at Gatecoin, the first cryptocurrency exchange to list ether, Ethereum’s native cryptocurrency.
I’m passionate about Bitcoin, Ethereum, DeFi, Web 3.0, and all things crypto. When I’m not writing or heads down in crypto, I’m learning to become a developer at Lambda School.
The views, information, and opinions expressed are solely those by the author and are meant for informational purposes only and are not intended to serve as a recommendation or investment advice to buy or sell any securities, cryptoassets, or other financial products.