What is PoolTogether?
PoolTogether is a decentralized no-loss lottery or decentralized prize
savings application where users get to keep their initial deposit amount
after the lottery prize is drawn. Instead of funding the prize money using
the lottery tickets purchased, the prize money is funded using the interest
earned on Compound by the pooled user deposits. For each round of
PoolTogether, all the user deposits will be sent to Compound to earn an
interest and one lucky winner will be selected at random at the end of each
interval to win the entire interest prize money.
Participating in PoolTogether is fairly straightforward—simply
“purchase” PoolTogether tickets using DAI or USDC. Each ticket
represents 1 entry and the chance of winning increases proportionately
with the number of tickets purchased. PoolTogether currently supports 2
different lotteries - a weekly DAI pool (launched December 2019) and a
daily USDC pool (launched February 2020).
A portion of the money currently earning interest in PoolTogether is
sponsored. Currently, this amounts to roughly $250,000 in the Dai pool
and $200,000 in the USDC pool. This is provided by sponsors to increase
the interest earned on Compound each week to make the prize pool larger.
The sponsored tickets are not eligible to be a winner on PoolTogether.
This concept is not new and it is similar to Prize-Linked Savings Account
(PLSA) where it incentivizes people to save more in their bank’s savings
account by providing sweepstakes for lucky winners. PLSA is a popular
concept with banks and credit unions from many countries around the
world offering such programs. One of the known PLSA programs is
“Save to Win” by Michigan Credit Union League.
Why bother with Decentralized Lotteries?
One of the attractions of decentralized lotteries in the context of
PoolTogether is that funds do not go through middleman or brokers, but
are instead held by smart contracts that have been audited. There is also
no lock-up period on funds, meaning that they can be withdrawn at any
moment.
Traditionally, the jurisdiction and protection laws of the gambling
industry have made real-world no-loss lottery, such as PLSA programs,
restrictive to users from certain geographical areas to join. This is where
Decentralized Applications truly shine as well—anyone from anywhere
can participate if they have the funds to do so.
What’s the Catch?
Surely there can’t be free money? Spot on! There’s a small catch - the
opportunity cost of putting your funds into PoolTogether. If you put your
funds into Compound to supply liquidity, you will be able to earn interest
from it but if you put it into PoolTogether, you will lose the interest that
can be earned from Compound but instead now have the opportunity to
win the lottery. Your “fee” to enter the lottery is effectively whatever
interest you would have earned by lending it out on Compound.
So, Lending on Compound vs. participating in PoolTogether?
Naturally, the next question we asked ourselves - would it be better to put
our money in Compound or in PoolTogether?
To make better sense of these numbers, we will walk through them line
by line. We will start off by assuming that we will be depositing $1,000
worth of either DAI or USDC. Note that the figures given here are just
for the purpose of this explanation. For the latest figures, please head over
to: https://www.pooltogether.com/#stats. First, we will see what the supply APR for Compound is, which you can
find here: https://compound.finance/markets. From this rate, we simply
divide it by 52 (for weekly) or 365 (for daily) to get the new periodic rates.
This would give us daily and weekly interest earned.
Daily Interest Earned = Compound Supply APR/365
Weekly Interest Earned = Compound Supply APR/52
Now, since we have the Compound interest amount (which is
guaranteed), let’s see how much we can expect to win from Pool
Together. Let’s say the DAI pool has 1,000,000 total tickets while the
USDC pool has 300,000 total tickets.
As mentioned earlier, both sponsored and open tickets WILL NOT win
the lottery. However, they will both contribute to the interest earned for
that period, making the prize pool much larger and attracting more
people. We then calculate this prize pool amount by simply multiplying
the total number of tickets by the weekly/daily interest rate that we
calculated earlier.
USDC Prize Pool Amount = Total Ticket * Daily Interest Rate
DAI Prize Pool Amount = Total Ticket * Weekly Interest Rate
The chance of winning is proportional - the more tickets you buy, the
higher the chance of winning. Multiply this with the new interest amount
and you’ll have Expected Returns for that time frame. Annualize this
number and you can compare it to the earlier number from lending it
directly to Compound.
If this expected return is more than good enough for you, do look into
getting into it. The Alpha (Expected PoolTogether Returns over
Compound lending returns) will decrease as more tickets come into play
due to opportunity cost. While the numbers do seem to suggest that it’s a
good idea to consider PoolTogether, due note that you may be unlucky
and not win a single lottery at all throughout a year.
In terms of security and funding, PoolTogether was funded by Maker and
has gone through several security audits to review their codes.
PoolTogether also had a fundraising round which enabled them to
increase the sponsored pool, and no longer takes fees from the winnings
as initially planned, which means more money for the winner!
