NFT to the rescue as PoolTogether mounts legal defense

DeFi on the docks as PoolTogether is sued

Ethereum DeFi lottery and savings protocol PoolTogether has launched the Pooly NFT collection to help you financially fight an impending class action lawsuit. The lawsuit by a former staffer of notoriously anti-crypto US Senator Elizabeth Warren names the company and its investors. It seeks to determine who is legally responsible when a DeFi protocol is said to have harmed a user.

In October 2021, Joe Kent, a former employee of the fiercely anti-crypto U.S. Senator Elizabeth Warren, filed a class action lawsuit against PoolTogether for violating New York state gambling laws. The lawsuit against PoolTogether is seen as a test case to change the landscape of DeFi regulation.

Now, PoolTogether has launched the Pooly NFT collection and will use the proceeds from the sale of the 10,110 NFTs to crowdfund their legal defense. Within two hours of its launch, the collection raised 73 ETH, or about $135,000, with a target of 769 ETH, or about $1.5 million, with more than three weeks left for minting.

Prices vary, and those who want to show their support for PoolTogether can get three tiers of NFTs ranging from 0.1 ETH to 75 ETH. Purchasing Pooly NFT is a way to help PoolTogether defend itself against the class action lawsuit. What’s more, it’s interesting that NFTs are coming to the rescue as a crowdsourcing method that can actually give something back to fans for supporting a product they believe in.

Very worried or pushing an agenda?

In his complaint, Joe Kent is also described as “gravely concerned that the cryptocurrency ecosystem, which requires massive amounts of electricity, is accelerating climate change and allowing people to evade financial regulations and rip off consumers.” This statement simply echoes the agenda launched by his former employer, Senator Elizabeth Warren.

As mentioned above, Joe Kent’s claim against PoolTogether is widely thought to be more about supporting his boss’s plan. As the claimant had only deposited the equivalent of $10 on the platform, he is not seeking any form of compensation. Additionally, he seeks legal clarity by putting PoolTogether in the spotlight and potentially creating a watershed moment for DeFi dapps and the broader ecosystem.

The lawsuit names Brooklyn-based corporation PoolTogether, its founder Leighton Cusack, and a host of investors in the protocol, including Dragonfly Capital, Compound Labs, and Galaxy Digital Capital Management, as defendants. Individual investors in the project are also named, including Stanislav Kulechov, founder and CEO of the DeFi platform Aave.

By naming the company and its investors, Kent’s lawsuit aims to determine who is legally responsible when a DeFi protocol is said to have harmed a user. Depending on the outcome of the case, this could have huge ramifications for decentralized projects, including decentralized exchanges and DAOs. Additionally, it will test most projects on how decentralized they are.

What is PoolTogether?

Technically speaking, PoolTogether is a DeFi savings protocol with a twist. The dapp allows users to deposit funds and enter a lossless savings game where they can win prizes for depositing funds on the platform. More simply, it is a combination of lottery and crypto gambling, in which users sacrifice a smaller amount of potential return in favor of a potential jackpot.

Users deposit cryptocurrency in groups to purchase tickets, with each group holding a weekly raffle that awards a prize to up to five winners. However, tickets do not expire after the draw. Instead, the tickets roll over to the next draw, the next, until you win or withdraw your funds from the pool. In this way, it is a no-loss lottery, as you may not win, but you cannot lose.

Where do the prizes come from?

PoolTogether takes the premise of crypto gambling and operates it at scale, like a lottery. Firstly, when users deposit funds in groups, they are staked through the Compound DeFi platform to generate a percentage return. The generated yield is then used to make the lottery rewards.

Participation rewards vary depending on the tokens that are deposited, but with so many players continually pooling their funds over the long term, it can add up to big jackpot sums. Additionally, automated smart contracts pick winners and keep other players signed up for the latest weekly draws without the need for any manual action each week.

The idea turned the traditional vision of a lottery on its head. Particularly the idea that participating in a lottery is an expensive habit with little chance of winning, where every week you spend but usually don’t win anything. With PoolTogether, users buy a valid ticket until they win or stop participating.

In reality, it is nothing more than a betting incentive mechanic. The chance of winning the lottery is, of course, slim, however it is an added layer of attraction to the relatively mundane task of gambling crypto for rewards. Also, there are Ethereum transaction fees to pay to opt out of the platform, so most users will keep their tokens locked in the staking contract, avoid fees of around $20, and have a chance to win the lottery every week.

What’s the trick?

There are no apparent risks in writing, and players’ money is safely stored in a smart contract. The smart contract is fully automated, and the team behind the project claims that it also went through several independent smart contract audits by OpenZeppelin & Quantstamp. In terms of security, it’s just the user and the smart contract.

Also, PoolTogether has been running successfully for a long time and is not classified as a high-risk dapp on DappRadar. However, as with all new technology, there are some drawbacks to be aware of. Namely, transaction fees can be expensive due to the demand on the Ethereum network, and if you only plan to put a few dollars into a pool, it might cost you more to pay the transaction fee. Maybe that’s what Joe Kent did?

Additionally, there is the opportunity cost of locking your cryptocurrency in a pool, as you could stake those funds or provide liquidity through a decentralized exchange for a return. Instead, you’re pooling them together in hopes of winning a jackpot. Finally, the chance of winning grows the more tickets you buy, so one flaw is that it can potentially help the rich get even richer. Still, anyone who plays can potentially win.

Uniswap, PoolTogether, who’s next?

Web3 and decentralized organizations are here to shake up the status quo and bring more efficient and enjoyable services to end users. No industry is safe from disruption, and dapps have already infiltrated finance, music, social media, art, gaming, ticketing, point of sale, and logistics, with more cases coming of use.

In the areas of finance and gaming, the impact of dapps is already incredibly strong, and now, in what can only be described as a bear market, serious projects are being prepared to put their heads down and build under the watch of new regulations and attention to mass adoption.

Decentralized entities present a specific set of challenges for legislators and regulators due to the decentralized way they are built. Also, as Elon Musk rightly says, “regulation is very, very slow.” In general, innovation proceeds much faster than regulation.

Dapps provide a particular headache, as they perform actions that can be carried out by several separate entities, all from one platform. So who’s to blame when it goes wrong? Is PoolTogether for providing the platform? o Compound to serve performance. Maybe it’s neither, or both? Maybe it’s the user’s fault entirely.

More importantly, dapps are getting into the hands of ordinary people and not just cryptocurrency and blockchain advocates. These people need quick access to content and tools to help them with their journey and are a big reason DappRadar is building the world’s Dapp store. The PoolTogether case will bring big investors like Aave and major operators like Compound into a conversation about regulation and user safety. Both will arguably support that conversation, given that they are both long-term players in the space with ambitions to continue.

Global interest in crypto regulation | last 5 years | google trends

Earlier this month, Uniswap, the leading decentralized exchange, came under fire as a new class action lawsuit filed by a user claims that Uniswap Labs and its investors are liable for their losses as a result of breaching securities laws. The lawsuit concerns bad actors who used the Uniswap protocol to run pump and dump schemes, according to North Carolina’s Nessa Risley, who points to a lack of know-your-customer (KYC) due diligence and a lack of registration with the Department of Securities and Exchange Commission as the main reasons for his complaint.

Simply put, investors took a chance and are now asking for government help because they got burned out and didn’t do their research. While this is a somewhat primitive view, it is as plausible as the allegations raised in the complaint.

The results of such cases could have serious implications for dapps in the future. The Wall Street Journal claims that the PoolTogether lawsuit appears to be a deliberate effort to test some of the fundamental doctrines of the DeFi community. PoolTogether says that while the allegations are without merit, a thorough defense is still needed. You can read the complaint filed here and PoolTogether Inc’s initial response here. Instructions for accessing all court documents can be found in the Frequently Asked Questions.

The foregoing does not constitute investment advice. The information provided here is purely for informational purposes only. Please exercise due diligence and investigate. The writer holds positions in various cryptocurrencies including BTC, ETH, and RADAR.

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