Chapter 10: Decentralized Lottery

So far, we have delved into a series of protocols related to stablecoins, decentralized exchanges, swaps, and derivatives—all serious topics. In this section, we will introduce you to a category of lighthearted and fun applications—decentralized no-loss lotteries.

In early February 2020, a user won $1,648 in the weekly Dai prize pool of PoolTogether with a $10 entry, equivalent to a 1 in 69,738 chance of winning. The advantage of the PoolTogether lottery is that if the participant does not actually win, their $10 deposit will be fully refunded. There are no losers in this game, only opportunity costs. Please continue reading to learn more.

PoolTogether

What is PoolTogether?

PoolTogether is a decentralized no-loss lottery or decentralized savings reward application, where users can retrieve their initial deposit amount after the lottery ends. Unlike traditional lotteries where the purchase funds are used as prizes, PoolTogether deposits the purchase funds into the Compound platform to earn interest as the prize. For each round of PoolTogether, all users' deposit funds are sent to the Compound platform to earn interest, and at the end of each draw period, a lucky player is randomly selected to win all the interest.

Participating in PoolTogether is very simple—just use DAI or USDC to "buy" a PoolTogether lottery ticket. Each ticket represents one chance to win, and the chances of winning are proportional to the number of tickets purchased. PoolTogether currently supports two lotteries—the weekly DAI pool (launched in December 2019) and the daily USDC pool (launched in February 2020).

Currently, part of the funds used to earn interest in PoolTogether is extra sponsored funds. There is approximately $250,000 in extra sponsorship in the Dai pool and about $200,000 in extra sponsorship in the USDC pool. Sponsors provide these to increase the interest earned weekly on the Compound platform, thereby increasing the prize pool amount. The tickets purchased by sponsors do not enter the PoolTogether lottery process.

This is not a new concept; it is similar to the "prize-linked savings account" (PLSA) concept, which encourages people to deposit more money into bank savings accounts by rewarding lucky users. PLSA is a popular concept, and many banks and credit unions around the world offer such products. The "Save to Win" program from the Michigan Credit Union League is an example of a PLSA program.

Why Do We Need Decentralized Lotteries?

Taking PoolTogether as an example, the appeal of decentralized lotteries lies in the fact that funds are handled by audited smart contracts rather than intermediaries or brokers. There is also no lock-up period for the funds, meaning they can be withdrawn at any time.

Traditionally, the jurisdiction and protection laws of the gambling industry have limited real-world no-loss lotteries (such as PLSA products) to users in certain geographical areas. This is also the advantage of decentralized applications—anyone with money can participate from anywhere.

How to Profit?

Are prizes offered for free? Certainly not! There is a small key point—the opportunity cost of putting funds into PoolTogether. If you invest funds into the Compound platform to provide liquidity, you will be able to earn interest from it, but if you put it into PoolTogether, you will forfeit the interest from the Compound platform in exchange for a chance to win the lottery. In fact, the "cost" of your lottery ticket is the total interest you would have earned by lending the funds to the Compound platform.

Lending on Compound or Buying into PoolTogether?

Of course, we must ask ourselves a question—what is better, depositing funds into the Compound platform or PoolTogether? We have gathered some data—please compare the table below:

(Some data sourced from https://www.pooltogether.com/#stats and https://compound.finance/markets)

In summary—at the time of writing this article, PoolTogether seems to offer higher returns than Compound because the PoolTogether platform has pledged sponsorship funds that cannot participate in the lottery. However, that said, you may not want to compare lotteries with savings as two types of investments; our findings are for reference only!

To better understand these numbers, we will interpret them one by one. Suppose we deposit $1,000 worth of DAI or USDC. Please note that the numbers provided here are for illustrative purposes only. For the latest data, please check: https://www.pooltogether.com/#stats

First, we calculate the supply APR on the Compound platform, which you can find here: https://compound.finance/markets. Based on the yield calculation, we simply divide it by 52 (weekly) or 365 (daily) to obtain the new periodic yield, and then calculate our daily and weekly interest.

Daily interest earned = Compound supply APR / 365

Weekly interest earned = Compound supply APR / 52

Now, since there is a compounding amount (which is guaranteed), let’s see how much we can profit from PoolTogether. Suppose there are a total of 1,000,000 tickets in the DAI pool and 300,000 tickets in the USDC pool.

As mentioned earlier, the sponsored funds and public funds will not participate in the draw. However, they will contribute to the interest earned during that time period, making the prize pool larger to attract more participants. Next, we simply multiply the total number of tickets by the weekly/daily rate we previously calculated to determine the prize pool amount.

USDC prize pool amount = Total number of tickets * Daily rate DAI

Prize pool amount = Total number of tickets * Weekly rate

The chances of winning are proportional to the number of tickets purchased—the more tickets you buy, the greater your chances of winning. Multiply this by the new interest amount to get the expected return for that period. Calculating this number on an annualized basis, you can compare it with the previous data (directly deposited into the Compound platform).

Expected return = Number of tickets purchased / Number of tickets available for drawing * Prize pool funds

Total annual return = Expected return * Number of periods (52 or 365)

If this expected return is good enough for you, then it’s worth a try. As opportunity costs increase and more funds enter, Alpha (the portion of expected PoolTogether returns exceeding Compound platform savings returns) will decrease. Although this data seems to suggest that using PoolTogether is a good idea, it should also be noted that you may be unfortunate and not win any lottery tickets within a year.

In terms of security and funds, PoolTogether is funded by Maker and has undergone several security audits and code reviews. PoolTogether also conducted a fundraising round to increase the amount of sponsorship funds and will no longer charge service fees from the prize pool as originally planned, meaning winners will receive more prizes

If you wish to start using or testing it, we will provide a step-by-step guide to participating in PoolTogether. Alternatively, you can move on to the next chapter to learn more about the next DeFi application.

PoolTogether: Step-by-Step Guide

Step 1

• Visit the website: https://www.pooltogether.com/
• Connect your wallet
• Ensure you have DAI

Step 2

• Enter the number of tickets you wish to purchase
• Note: The price of one ticket is 1 DAI, representing one chance to win. Your chances of winning increase with the number of tickets purchased.

Step 3

• First-time participants need to click the "Start DAI" feature.

Step 4

• Next, continue to purchase.

Step 5

• Done! You just need to wait for PoolTogether to announce the weekly draw results.

Recommended Reading

1. A Simple Explanation of Risks Using PoolTogether (PoolTogether)

https://medium.com/pooltogether/a-simple-explanation-of-risks-using-pooltogether-fdf6fecd3864

2. How PoolTogether Selects Winners

https://medium.com/pooltogether/how-pooltogether-selects-winners-9301f8d76730

3. No Loss Lottery Now Holds $1 Million Tokenized Dollars (TrustNodes) https://www.trustnodes.com/2020/01/29/no-loss-lottery-now-holds-1-million-tokenized-dollars

4. PoolTogether - Prize Linked Savings Account (Nick Sawinyh)

https://defiprime.com/pooltogether

5. How PoolTogether Turns Saving Money Into a Game (Binance)

https://www.binance.vision/tutorials/how-pool-together-turns-saving-money-into-a-game

6. Leighton Cusack Explains How PoolTogether, a No-Loss Lottery Works - Ep. 6 (CoinGecko Podcast) https://podcast.coingecko.com/719703/2879608-leighton-cusack-explains-how-pooltogether-a-no-loss-lottery-works-ep-6

7. A data-driven look inside Pool Together (TokenAnalyst)

https://research.tokenanalyst.io/a-look-inside-pool-together/