Why You Should Consider Pooling Support Behind DeFi’s PoolTogether

A class-action suit winding through New York’s court system is frivolous and counters crypto’s core principles.

AccessTimeIconMay 31, 2022 at 7:25 p.m. UTC
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AccessTimeIconMay 31, 2022 at 7:25 p.m. UTCLayer 2
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Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

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You should consider buying a non-fungible token (NFT) to support the Ethereum-based mainstay of decentralized finance (DeFi) called PoolTogether. Currently, there’s a class-action lawsuit filed against the popular application winding through the New York court system, with potentially far-reaching effects for the crypto industry.

Last October, Joe Kent, a software engineer and former staffer for the consistently anti-crypto Sen. Elizabeth Warren (D-Mass.), sued PoolTogether in New York State for allegedly running an “unauthorized lottery scheme.” And now the company behind the protocol is selling “Pooly” NFTs to fund its legal defense.

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PoolTogether is a “no loss” lottery that allows people to contribute cryptocurrency to a shared pool that reinvests funds in yield-generating DeFi products, and then pays out that income as rewards to a few lucky “ticket” holders every week. Unlike a traditional lottery, PoolTogether’s smart contracts allow people to recuperate their investments if they lose the draw or reinvest in the ongoing financial operation.

Although you may not “win” using PoolTogether, you cannot lose. The tool, one of first decentralized apps grouped under the burgeoning DeFi economy, is a liquidity provider for the industry and a way for crypto holders to potentially be rewarded for holding crypto or participating in these community games.

Ahead of filing his lawsuit, Kent deposited $10 in crypto into the protocol. He’s claiming the application built by PoolTogether Inc., which is incorporated in Delaware, supports an illegal form of gambling. New York state law allows buyers of unregulated lottery tickets to bring class-action lawsuits on behalf of themselves and other ticket holders.

There’s a small issue regarding only PoolTogether and how it might fit under existing financial rules. The company’s lawyers have argued that PoolTogether is not a lottery, but something closer to a Premium Bond – a prize-linked savings account that lowers investment risks. U.S. banks and credit unions have been authorized to provide these services since 2014.

The larger issue, however, touches all of crypto. In essence, the lawsuit is about decentralization and the responsibility software coders hold once crypto applications go live. “It aims to test the question of whether or not creators can make something, release it on a blockchain and really claim not to control it anymore,” Axios’ Brady Dale wrote.

Smart contracts cannot be edited once launched. And like other DeFi tools, PoolTogether has sought to give its users a stake in, control over and governance of the protocol by issuing its own crypto token called POOL.

Legal responsibility?

Kent has also filed suit against PoolTogether founder Leighton Cusack and a number of the protocol’s investors, including Dragonfly Capital, Compound Labs and Galaxy Digital – thus raising questions about who is legally responsible in cases of “harm” in crypto. In his complaint, he also criticized crypto’s environmental impact and the scam culture that thrives in the industry.

His concerns are real, and there is a need to maintain avenues for litigating against crypto founders that do real damage. Figures like Terra’s Do Kwon should take responsibility for the harm they cause if and when things go awry, especially if they maintain technical control and influence over a protocol.

However, Kent’s specific case is frivolous and seeks to undermine the core tenets and value of the crypto industry. Decentralization is a spectrum, and one that is largely only achieved in time. Crypto potentially benefits the world by removing gatekeepers and intermediaries from some financial and cultural services.

DeFi is experimenting with the notion that tools can be built and successfully turned over to its communities. This is a departure from the world of traditional financial services, but a method that has long been applied to open source-software development. Saying Cusack is liable for his app in perpetuity undermines crypto’s chief aims.

Just as Bitcoin was built by Satoshi Nakamoto and released into the world for anyone’s benefit, that might be reproducible across blockchains.

Cusack has argued that the PoolTogether tool is an open source and noncustodial protocol. The eponymous PoolTogether company has contributed software development to its open-source code and maintains a web interface at pooltogether.com, but it doesn't profit from the PoolTogether protocol that would continue existing without their presence.

That said, the company has raised funds and has significant exposure to the POOL governance token – all by design. DeFi allows builders to risk spending time and effort building token-powered tools, with the hopes that through increased use and speculation their treasuries will increase in value. Today, POOL is worth about $1, significantly down from $26 at launch.

Cusack is also front and center to the legal fundraising that’s hoping to raise 769 ETH (about $1.5 million) by selling NFTs. Proceeds from the sale will go to PoolTogether Inc. and will be “used for legal expenses of the company and its officers and directors, as needed” with any remaining assets going towards “other business purposes,” the campaign website reads. Some 460 ETH has been raised so far.

Though there are legitimate questions about decentralization and about securities rules regarding tokens, the rules are stated clearly up front. You can get involved, take on risk if you want because these protocols are supposed to be open source. Kent said he has about $12 at risk in PoolTogether.

The real crime might be the $400 in ETH Kent spent in gas fees getting onto the app.

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Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.