Ethereum No-Loss Lottery System: DeFi democratize Saving Prices and make them more transparent

Times change fast in the crypto and blockchain space. While in the last years many people (inclusive myself) were talking about the added value of blockchain implementation and revolutionary business models. There were few realized projects on the market and not many people were using them.

By now many projects moved from the proof of concept stage and have been launched on the Ethereum mainnet. Although also independent from it, DeFi boosted this adoption and brought many revolutionary new applications on the market that disrupt their off-chain equivalents. This attracted large numbers of users that use these applications frequently.

One of these projects is PoolTogehter which is backed by renowned crypto companies such as ConsenSys. They have created a “Crypto Lottery” which allows participants to win a jackpot without losing the value of “the lottery ticket” based on the principle of saving prices.

So what are saving prices in the first place?

Generally, the concept of saving prices has nothing to do with blockchain technology per se, but blockchain will bring an added value as you will see later in this post. A famous example of saving prices are Premium Bonds in the UK that 22 million people are holding. The bonds work as follows: They generate interest and by chance one or multiple holders of such bonds are selected to win the interest accumulated by all bonds. Each bond is like a lottery ticket so the more bonds you hold the higher the chances of winning. The difference to a common lottery is that the jackpot is based on the interest accumulated not on the ticket value.

So, if you participate and are not chosen as the winner, which will be mostly the case, you still keep the value of your bonds.

This is called saving price because you are saving your money while the lottery is ongoing. When you are lucky and selected as a winner you receive a price. So, contrary to traditional saving accounts where you would receive a fixed rate of interest on your balance the interest rate of a saving price is zero but you can win a price that is more than the accumulated interest in a year with reduced risk as you can only win but not lose your initial investment.

The blockchain alternative on Ethereum

The team behind PoolTogether picked up on this idea and created the blockchain alternative on the Ethereum platform. The principle is the same as with Premium Bonds but bears several advantages. PoolTogether currently offers two types of pools a weekly and a daily pool where everybody who has a blockchain wallet with at least one Dai can participate.

Dai is a stablecoin that is pegged to the US Dollar, so every Dai token has the value of one US Dollar.

Each Dai deposited in a pool represents one “lottery ticket”. When you deposit Dai, the PoolTogether protocol transfers it to Compound.Finance, a popular DeFi application. On Compound.Finance the funds are lent out to other users that pay an interest on it. Depending on which pool you deposited your funds all interest that is generated in a day or week on Compound is given to a randomly selected participant of the pool. While everybody else gets their Dai back and can participate in the next pool or withdraw it.

So, compared to similar types of saving prices such as Premium Bonds what is the advantage to launch it on Ethereum?

Firstly, as in the spirit of crypto, everybody can participate in PoolTogether there are no entry barriers besides having an internet connection and a wallet containing at least one Dai. Premium bonds on the other hand are subject to geographic restrictions and can not be purchase by everybody globally. Also, the financial barriers are lower to participate. While the minimum purchasing price of Premium Bonds is £25 it is $1 for PoolTogether allowing more people to participate.

Secondly, as in most lotteries, a part of the price goes to the organization that manages the lottery such as NS&I for Premium Bonds. PoolTogether on the other hand does not take a share of the interest generated. It is backed by several venture capital firms that support the project. Even if in a later stage the team would take a share of the interest to finance the project it would be a smaller share. This is possible as the protocol is automated by smart contracts.

Lastly, there is transparency and randomness of picking a winner with PoolTogether. Even though I believe this is the same for Premium Bonds there is still a human element involved and not all processes are shared with the public. PoolTogetehr following the idea of blockchain is transparent, the platform code is open-source which means the code of the smart contracts are publicly accessible and the community can propose changes. The script to select the winner by generating a random number can be accessed on GitHub and everybody can check if it is a truly random selection.

What does this teach us about DeFi?

Besides the added value compared to the traditional model, PoolTogether is a great example of DeFi as it showcases one of the main value propositions: Interoperability of applications. The PoolTogether application connects to another application in this case Coumpond.Finance to use its services in an automates, transparent and secure way due to the nature of Ethereum.

DeFi is often called “The Money Lego”. As it is very easy to link different DeFi applications like Lego pieces together by smart contracts. This gives the opportunity to create revolutionary business models, unimaginable before. Opening barriers to participate and destroying silos and inefficiencies of the traditional financial system which is the essence of DeFi.

Please Note:

While revolutionary and very promising DeFi applications in general and therefore also PoolTogther are new technologies than can contain errors in the code even though being audited by experts. Investing in such an application is always involved with high risk and one should only invest as much as one is willing to lose. I have no relationship with the PoolTogether team and have not used the platform.

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