Buying lottery tickets is a terrible deal. But what if you could get the lottery tickets for free?
With PoolTogether, you basically can! As a no-loss prize game, PoolTogether has a really interesting product that lets people pool their interest to reward one user with a huge sum of money each week.
Traditional Lotteries
Traditional state lotteries use huge prize offerings (many millions of dollars) to convince people to buy tickets. The proceeds for these tickets are usually used to fund schools or other public goods - not necessarily a bad thing. It is odd, though how state lotteries have a government-given monopoly on such a product. And what's worse is that traditional lotteries tend to take the most advantage of low-income, under-educated populations.
From a 2011 study:
Those in the lowest fifth in terms of socioeconomic status (SES) had the “highest rate of lottery gambling (61%) and the highest mean level of days gambled in the past year (26.1 days).”
Drawn in by the promise of winning a life-changing sum of money, people fork up a lot of money for tickets. In 2015, Massachusetts had the highest per-capita spending on lottery tickets in the nation at $735!
Why's it so bad to play the lottery?
Because the game is rigged.
Think about it this way: if you were running a lottery, would you price your tickets so that most people win, break even, or lose money on your tickets? If you price your tickets such that most people win more money than they spend, you won't be profitable. Lotteries price their tickets such that most people lose money. That way, they can turn a profit after they pay the prize money out to winners. Odds vary by state and game, but you're never going to get better odds than the house.
Here's what makes the lottery so damaging, though: once you buy a ticket, you'll never see that money again.
No-loss prize games fix this part of the lottery system.
PoolTogether
PoolTogether is the biggest no-loss prize game on the Ethereum blockchain. As of September 27, 2021, there was a staggering $120 million deposited on the platform, with $95,000 in prizes being given out weekly! Here's how it works:
No-Loss Prize Games
In a no-loss prize game, you're not required to purchase a ticket that will expire worthless. Even so, you have a chance to win a lot of money by entering the game.
Wait - you can enter the lottery without paying for a ticket? Is it a scam? Is someone just giving out free money?
No! Here's how a no-loss prize game - specifically, PoolTogether - works:
First, users deposit tokens (usually stablecoins like USDC, Tether, or DAI) into a pool on PoolTogether. PoolTogether takes all of these deposited tokens and invests them, either depositing the funds onto Compound or Yearn, where they are lent out to borrowers. Borrowers pay interest on these loans, and the interest is used to fund the prize money!
Each player is given a certain number of "tickets" based on the relative amount they contributed to the pool. For example, if a pool has $900 in it and I add $100 (bringing the pool to $1,000), I'll receive 10% of the tickets for the pool.
Winners are chosen at random. Since I have 10% of the outstanding tickets in the example above, I'll have a 10% chance of winning. Most contests are run on a weekly basis, meaning that each week's interest earnings (from Compound or Yearn) are used as the prize. A few pools operate on daily schedules, but their prizes are lower (because you earn less interest in 1 day than you do in 1 week).
Different pools have different prize structures. Sometimes, a pool chooses 5 winners. Other times, the pool has 30 winners in a week. Once you win a contest, your winnings will be automatically converted to more tickets in the pool, increasing your chances of winning.
What happens if you don't win the pool? You get your tickets back! That's what makes PoolTogether "free" - instead of paying upfront costs and then losing the value of your tickets, your money is continually re-invested.
The Prizes
Let's take a look at the current contests being run. Head over to app.pooltogether.com to see the full list.
The biggest pool today is offering $43,075 in weekly prizes.
In this pool, people are depositing USDC (a stablecoin on the Ethereum chain). That USDC is invested on Compound, an Ethereum protocol for borrowing and lending assets. The pool has over $49 million worth of USDC deposited!
In addition to the interest rate paid to lenders on Compound, lenders sometimes earn additional rewards for lending their money. In this case, the pool is also earning COMP tokens. These tokens are also distributed to the pool winners.
This pool will reward 5 winners weekly. This week, 5 winners will earn $8,619 each!
The Downsides?
Though there's not a formal cost to using PoolTogether, there are some implicit costs and risks that you should take into account.
What's the implicit cost of entering a PoolTogether contest? It's the opportunity cost: what else could you have done with that money? By depositing $100 into a pool, you can't lend that out yourself. If you could loan that money out on Aave or Compound at a 6% annualized rate, your annual cost of entering the PoolTogether contest is roughly $6 (because you'd have approximately $106 at the end of the year if you lent the money). The counter-point to this is that if you win, you could win really big (thousands of dollars).
One could argue that PoolTogether favors larger depositors. If a large depositor is ~20-30% of the pool, they'll have a much greater chance at winning the prize money than smaller depositors who may only have 0.5% of the pool. In that case, the large depositor is essentially taking advantage of the smaller depositors in order to boost their yield (of course, a little bit of luck is still required). This issue has been partially solved by moving from 1 big prize to sharing the pool's prize among 5+ winners.
As with anything in crypto, there's smart contract risk. Though PoolTogether's smart contracts have been audited and have now been used by many people, there could still be a vulnerability that puts your funds at risk. Also, there's smart contract risk with the protocols that PoolTogether uses to generate yield. If Compound or Yearn have vulnerabilities, your funds will be at risk. As these are established protocols with well respected development teams, this risk is low but ever-present.
Finally, you'll need to take into account transaction costs. Transaction costs on Ethereum can be really high, making it unfeasible to continually transfer your savings into a pool. One could mitigate some of this cost by using PoolTogether on Polygon, a Layer 2 chain that's built on top of Ethereum.
Final Thoughts
I’d encourage everyone to give PoolTogether a try. You’ll stand to win thousands of dollars without ever buying a lottery ticket!