By Ria Bhutoria and Wilson Withiam
Know & go
- A closer look: PoolTogether, a lossless lottery leveraging DAI, Compound Finance, and Aragon as building blocks, went live on Ethereum mainnet this week. We provide a closer look at how no-loss lotteries, synonymous with prize-linked savings (PLS) accounts, incentivize saving behavior and discuss the historical context behind such programs as well as risks and challenges.
- Three things to know: (1) LedgerX received CFTC approval to offer physically settled bitcoin futures (2) Kraken raised $13 million through a crowdfunding campaign (3) MakerDAO announced a list of tokens that could be included as collateral when the network transitions to Multi-Collateral Dai.
- Market snapshot: Total crypto market capitalization is around $316.6 billion at press time (up 10.2% w/w). BTC is trading at $11,885 (up 20.1% w/w), ETH is at $306 (up 5.8% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 65.4%, down from 77.1% last week. (6/28 12:45PM ET)
A closer look: PoolTogether for the greater good
“Low income American families believe they are more likely to build wealth by playing the lottery than by traditional saving with compound interest.” — Harvard Business School survey
What is PoolTogether?
Leighton Cusack posted the idea for PoolTogether, a no-loss lottery (synonymous with a prize-linked savings account), in the MakerDAO subreddit in March this year. The project went live on the Ethereum mainnet this week, aided by a $25,000 grant from MakerDAO, the company. Participants can buy tickets for a given pool using DAI – each pool is open for three days and each ticket costs 20 DAI (as a reminder, each DAI is worth about $1, though it has historically experienced small fluctuations in either direction). The pool has no limit and collects as much DAI as possible. All the DAI in the pool is lent out on Compound and is locked up for fifteen days, collecting interest over that period of time. PoolTogether is also using an Aragon DAO to manage its finances.
PoolTogether is a lossless lottery in that participants receive the full amount of the funds they deposited at the end of the fifteen day lock-up period — the potential for upside with technically no downside. At the end of the fifteen day lockup, a single participant wins the interest earned on the funds over that time period. The startup takes a 10% cut of the interest earned and the remainder is paid out as the reward.
The idea of a lossless lottery is not new. It is similar in nature to a prize-linked savings (PLS) account (or a lottery-linked deposit account), which trails back to the seventeenth century. Prize-linked savings accounts use prizes to entice people to save money. In 1694, England launched an effort called the “Million Adventure” to finance its Nine Years’ War against France, whereby participants who put £10 into the account earned a ten year return of 6.15% and were in the draw to win prizes between £10 to £1,000 each year for the next sixteen years.
Since then, many countries, including in Latin America, South Africa, Sweden, U.K., Spain, New Zealand, Germany and most recently, the U.S., have leveraged the concept of a prize-linked savings account or lottery to encourage and incentivize healthy savings habits. One example of a successful PLS program includes South Africa’s Million-a-Month account, offered by the country’s First National Bank, which rose to 750,000 accounts containing a total of 1.2 billion Rand in two years (as of 2007). Another success story is the U.K. Premium Bond program, which had over £31.1 billion outstanding as of March 2006 and was more popular among lower income households than investment products like stocks. Studies found that sales of the product were higher even when aggregate savings were lower.
The U.S. has been a laggard due to strict state and federal regulations around lotteries – specifically the rule that the only entity that can operate a lottery is the state, until more recently. Indiana and Michigan were the first to launch PLS pilots, and the outcome reinforced the idea that such accounts encourage non-savers to begin saving or raise their aggregate savings, especially within low-to-moderate income families. As a result, other states began to see PLS programs as a much more economically healthy substitute for gambling or participating in a lottery. Over thirty states changed their regulations to allow financial institutions like banks and credit unions offer these products. Further, in 2014, the U.S. Senate passed a law allowing federally chartered banks to offer PLS accounts after recognizing the success of these programs in encouraging healthy saving behavior. This is the same principle that PoolTogether uses in crafting its no-loss lottery.
Possibilities of no-loss lotteries like PoolTogether
No-loss lotteries like PoolTogether gamify the process of saving, and are especially effective in tricking non-savers (those who spend as much as they earn or spend more than they earn) into saving their money while getting the opportunity to win (theoretically) free money. Cusack says, “Humans don’t act in rational ways economically. This is a way to help them act in a healthy irrational way.” If that’s true, the ultimate goal for a project like this is to displace traditional lotteries. According to Leighton Cusack (the creator of PoolTogether), North Americans spend $80 billion on lottery tickets every year. And, on average, investing one dollar into a traditional state lottery yields a loss of $0.52.
Simultaneously, a recent study found that 40% of Americans don’t have enough savings to cover an unexpected expense worth $400. And based on various studies, this is the demographic that lotteries tend to take money from. Thus, converting some portion of spending to savings could have an instrumental and positive impact. Additional use cases for a concept like PoolTogether have been discussed beyond incentivizing saving. For example, a platform like PoolTogether can be leveraged to create pools that use a lottery system to pay out grants and rewards to fund ecosystem development or charities by classifying predetermined winners.
PoolTogether building blocks
PoolTogether leverages multiple Ethereum-based open finance platforms to handle the flow of funds and provide complete transparency without having to custody user assets. As previously mentioned, all lottery tickets are denominated in DAI, the stablecoin users can borrow against ETH on the MakerDAO protocol. One of the primary benefits of using DAI is that it aligns with the project’s the no-loss narrative, as stablecoins have significantly lower price volatility when compared to crypto assets like BTC or ETH.
All of the DAI spent on lottery tickets is then pooled and loaned out on the non-custodial, peer-to-peer lending platform, Compound, where it earns interest for providing liquidity to the Compound money market. The APR for lending DAI on Compound is 8.0% at the time of writing. Compound’s lending rates for stablecoins are considerably higher than more volatile alternatives due to greater borrower demand for stable crypto assets. Further, interest rates offered by traditional money markets are a fraction of rates on Compound, meaning any interest accrued in traditional accounts over the same fifteen day period would be relatively lower. As a result, PoolTogether can offer a more compelling no-loss lottery reward without having to touch any customer funds. Further, stakeholders benefit from the added transparency of tracking fund flow via Ethereum smart contracts.
To add to PoolTogether’s radically transparent approach, it created an Aragon DAO to manage all finances. Any interested user can access the DAO contract to verify that the 10% cut of lottery winnings PoolTogether takes as a service fee is accurate as well as the allocation of its MakerDAO grant. This use of open source* smart contracts gives users insight into the inner-workings of its processes beyond traditional lotteries or prize-linked savings accounts. Moreover, integrating various open finance protocols into a single app — an effort that may have been near impossible as little as one year ago — exemplifies the growing possibilities of programmable money.
As an example of the cross-platform capabilities PoolTogether enables, Jake Brukhman mentions that users can now lock up ETH into a MakerDAO collateral debt position (CDP) contract to borrow DAI, and then use that DAI to purchase tickets from the PoolTogether smart contract, which proceeds to lend these assets using Compound’s smart contracts to earn interest. Notably, PoolTogether can be considered another platform that adds to the superfluidity of collateral within open finance applications.
Risks and challenges
Some might say that the opportunity cost of participating in a PLS program (or no-loss lottery) is that you miss out on interest payments you would receive by placing your funds into a savings product or higher returns by investing in other assets. However, PLS programs likely draw funds away from gambling and lottery tickets rather than savings and investment products, thus the true opportunity cost is simply spending the money. PLS programs may also appeal to the unbanked. Further, Coindesk makes the point that returns on a traditional savings account are a mere 0.9%, so the opportunity cost is low.
The opportunity cost of participating in the open finance version of a no-loss lottery is forgoing interest that can be earned with certainty by directly lending the funds on platforms like Compound, Dharma, BlockFi and the like. Therefore, large holders might avoid PoolTogether’s lottery, as they have a lower chance of earning interest versus a crypto lending platform that promises a return on investment (ignoring other risks).
Declining rates of return
Open finance lending platforms like Compound currently offer relatively more attractive rates to lenders than they would receive on traditional finance platforms. However, these platforms are relatively new and rates can fall as these platforms mature and usage goes up, which would diminish the attractiveness of locking up funds in a platform like PoolTogether. This would be especially problematic if gas costs on Ethereum were to rise.
Which brings us to our next point — PoolTogether is not completely free. PoolTogether is built on Ethereum and leverages other projects built on Ethereum. As a result, participants have to pay a small transaction fee (gas cost) in ETH. Moreover, PoolTogether takes a 10% cut of interest that accrues on DAI deposits on Compound. Now that the project has open-sourced its code, it would be trivial for someone to fork it and remove the 10% fee. However, in his latest Proof-of-Work newsletter, Eric Meltzer points out, “In the case where PoolTogether spent all of their 10% rake doing marketing, I’d expect that to outcompete a totally rake-free version that no one would have any incentive to market.”
In the U.S., regulators allow banks and credit unions to offer price-linked savings accounts. It is unclear how a project like PoolTogether, which also takes a 10% cut of interest earned on DAI deposits, would be regulated if lawmakers got wind of the project. But according to Balaji Srinivasan, its no-loss outcome may lower the chances of regulatory scrutiny.
While there are considerable barriers to mass adoption as this stage, PoolTogether uses a concept that has the potential to have a positive impact if the crypto industry is able to onboard mainstream users onto such platforms. What continues to blow us away is that projects like PoolTogether would not be as easy and quick to launch without the composable building blocks that exist on platforms like Ethereum. Further, while regulation is uncertain and may vary from region to region, similar to other open finance projects, PoolTogether has created a borderless no-loss lottery that enables global participation for the first time ever and that’s something to cheer about.
* Leighton Cusack initially decided to keep PoolTogether closed-source given the importance of economies of scale. After receiving feedback from the community, “specifically around the lack of ability to verify the contracts,” they open sourced the contracts the following day.
Weekly market snapshot
In other news
- This week, the CFTC approved LedgerX’s application for a designated contract market (DCM) license, which will allow the company to offer physically settled bitcoin futures. Additionally, this means that LedgerX can offer the product to retail as well as institutional clients. While there is no concrete timeline, LedgerX intends to be the first to market in the U.S. Other firms that intend to enter the futures market include ICE’s Bakkt, ErisX and SeedCX. Source.
- According to a CFTC report as of June 18th (when the price of Bitcoin was around $9k), hedge fund short positions using CME’s bitcoin futures outweighed long positions by 14%, though this was down from 42% the prior week. It’s important to note that this doesn’t imply that hedge funds are taking short positions solely because they believe the price of bitcoin will fall — it could be a part of a hedging strategy. Source.
- JPMorgan clients in the U.S., Europe and Japan have expressed interest in using JPM Coin to enable instant delivery of bond transactions in exchange for cash. The buyer uses JPM Coins to pay for the bonds, which are represented as tokens. It currently takes two days to settle a Japanese government bond transaction. Source.
- Synthetix, a synthetic asset issuance platform, suffered an oracle attack, with the attacker receiving 37 million sETH. The CEO and co-founder believes an automated arb bot took advantage of an error in the price feed of sKRW. The team has offered the owner of the bot a bug bounty to help resolve the issue. Until then, they have disabled transfers within the system. Source.
- Square has enabled bitcoin deposits in its Cash App for all its users. Users can deposit up to $10,000 worth of bitcoin in any seven day period. Prior, users could buy and sell bitcoin through the Cash App as well as send it to another wallet. Source.
- On June 26th, when bitcoin rallied to over $13,000, BitMEX announced that it saw over $1 billion in open interest on XBTUSD, over $13 billion traded on XBTUSD, and over $16 billion traded across all BitMEX products. Source.
- This week, Blockstack introduced a new, intentionally Turing incomplete smart contract language for the Stacks blockchain called Clarity, which is currently in developer preview. To date, developers have built over 140 applications on Blockstack without using a smart contract. Blockstack claims that its “approach makes it easier to reason about smart contract behavior, cost, and performance.” Source.
- This week, MakerDAO announced a number of tokens that could be included as collateral when the network transitions to Multi-Collateral Dai. The community will be able to vote on “the order in which these assets could be entered into the governance system as proposals for review and possible ratification by MKR token holders.” The tokens up for vote include Augur (REP), Basic Attention Token (BAT), DigixDAO (DGD), Ether (ETH), Golem (GNT), OmiseGo (OMG), and 0x (ZRX). The Maker Foundation chose these tokens “based on diversity, an average daily volume of several million USD, and the relative stability of each token.” Source.
- Crypto exchange Kraken was able to raise $13 million through a crowdfunding campaign that attracted over 2,200 individual investors. The exchange reportedly sought the capital in order to reach the $4 billion valuation it has been trying to reach since late last year. Source.
- Placeholder Ventures led a $2.5 million seed round for ConsenSys spin-out 3Box, a startup building decentralized identity tools for app developers. Additional investors included Venrock, Northzone, and CoinFund. The funding will be used to further decentralize the 3Box network and build a managed infrastructure service for developers. Source.
- Mulitcoin Capital and Intel Capital led a $3.5 million investment round in dfuse, which also included participation from Diagram Ventures. dfuse provides API integrations into the EOS blockchain and suite of developer tools. The startup is looking to support API access to other smart contract platforms, with Ethereum next on its roadmap. Source.
- Image hosting site Imugr received $20 million is venture equity from Coil, and in addition to the funding, Imugr is integrating Coil’s micropayments tool for content creators into its platform. Coil was founded last year by former Ripple CTO Stefan Thomas and is backed by Ripple’s Xpring Initiative, which aims to fund the proliferation of XRP. Source.
Global regulatory roundup
- France is creating a G7 task force to understand how banking regulations will be applied to cryptocurrencies like Facebook’s Libra, specifically mentioning money-laundering and consumer-protection laws. The announcement just days after Facebook released its whitepaper for its Libra network and participating partners. Previous comments from French regulators have said its government is not opposed to Libra, but insists that Facebook’s new digital coin cannot become a sovereign currency. Source.
- A group of democratic representatives have introduced a Bill to the House that aims to outlaw political party contributions or donations in cryptocurrencies such as bitcoin. Andrew Hemingway accepted crypto donations as early as 2014 and candidate Andrew Yang is currently doing the same. Source.
What we’re reading
- Regulators Have Doubts About Facebook Cryptocurrency. So Do Its Partners. by Nathaniel Popper
- Layer 2 scaling on ETH Thematic Insights by Delphi Digital
- How Bitcoin Can Help In The Fight For Human Rights by Laura Shin
- Examining Bitcoin’s Valued Attributes: A Letter to the SEC by Spencer Bogart
- Facebook Libra’s Master Plan by Eric Wall
- An Analysis of Kin’s on chain activity by Coinmetrics
What we’re listening to
- Chain Reaction: IDEX’s Alex Wearn: A Sleeping Giant’s Plan To Dominate Every Centralized Crypto Exchange
- Unchained: Alex Gladstein of the Human Rights Foundation on the 3 Reasons Bitcoin Matters
- Off the Chain: Andrew Keys, Co-Founder of ConsenSys: The History of ConsenSys and the Future of Automation
- What Bitcoin Did: Brian Quintenz on How the CFTC Regulates Cryptocurrencies
- Blockchain Insider: Libra: The banks are sh***ing themselves
- Base Layer: Richard Muirhead & Max Mersch (Fabric Ventures)
- Epicenter: The Regulatory Landscape for Cryptocurrencies and the SEC’s Case Against Kik
- Click here to apply: Erik Torenberg thinks we should build career moats
Circle in the news
- Circle CEO Jeremy Allaire joined NBC’s Squawk Box to discuss to recent Bitcoin rally and Facebook’s Libra.
- Jeremy Allaire and Sean Neville, co-Founders of Circle, talk to Coindesk’s Michael Casey at the Future of Fintech Conference in NYC.
Where we’ll be in July
- 2019 Mid-Atlantic Anti-Money Laundering Conference, 7/23-7/25, Arlington, VA