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Opinion: Ethereum lossless lottery PoolTogether is still innately flawed despite updates

Posted: 5 September 2019 1:20 pm
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Despite everything, PoolTogether is still an efficient way of transferring wealth from the poor to the rich.

How do you encourage people to practice responsible saving? Easy. You shake it up with a dose of randomness and call it a lottery instead. This is the basic principle behind Pool Together, a lossless lottery designed in such a way that there are no losers. The idea is that everyone always gets back the price of their ticket, but one lucky person walks away with a lot more than that.

Pool Together is built on Ethereum, and utilises the Dai stablecoin in combination with the Compound crypto lending system.

Everyone buys as many tickets as they want with Dai during an open period, then entry is closed and all the funds from all the tickets are pooled together and invested through the Compound platform. At the end of a set period everyone gets all their ticket money back, while one person also gets all the interest earned by Compound in that period of time.

This system is aimed at solving the problem which emerges somewhere between two facts:

  • Over $80 billion per year is spent on lottery tickets in the USA.
  • 40% of Americans do not have $400 of cash saved up.

"PoolTogether changes these economics by turning money spent into money saved," its FAQ explains. "We believe this is crucial to the economic safety and well being for millions of people around the world."

The latest update helps it serve this purpose much better. The minimum entry has been dropped from $20 equivalent to just $1, and funds can now be withdrawn from the lottery at any time. It also takes a step closer to that savings account ideal by automatically re-entering tickets into consecutive lotteries.

Of course, the billions spent on other lotteries may be driven largely by the prospect of winning millions. The earnings from PoolTogether aren't quite as life changing. The odds are much better though, and you don't lose the price of admission in the end.

Unfortunately, despite its ingenuity, the maths is still against PoolTogether. In its current form it's still going to funnel wealth from the poorest to the richest.


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Here's the catch

It's a catchy system, but PoolTogether is still a far cry from a viable savings account. The odds of winning are proportional to the number of tickets bought, which does functionally put the smaller buyers at a disadvantage.

So theoretically it all balances out, but only if you have infinite time. In the real world someone with only one ticket has such an insignificant chance of winning in their lifetime that they shouldn't bother, while someone who can afford to buy tens of thousands of tickets can expect to win frequently enough to make it worthwhile.

The end result is that in its current form, PoolTogether is actually more geared towards the exact opposite of what it intends to do: the poorest put their savings into the pot to drive even larger earnings towards the wealthiest, while the rich get their interest earnings bolstered by the contributions of the poor, who get almost nothing in return.

Eyeballing the numbers for the current session, it has almost 40,000 tickets in it at the time of writing, so your odds of winning per week with one ticket are about 1 in 40,000. Whether you go for a year, a decade or even a century, you should not expect to win anything. It is a statistically bad place to put your dollar.

The same is true for $10 or $100 of tickets. A 1 in 4,000 or 1 in 400 chance of winning per week does not give you a sufficient chance of winning anything within a realistic timeframe, and the entire time you try your money will just end up boosting the winnings of the richest people who bought the most tickets.

Gaming the system

Conversely, PoolTogether may actually be a great place to put money if you know you can consistently buy up a large portion of the total tickets in play. The pool locking system, which is necessary to prevent someone buying a lot of tickets right before the end of a round, also presents an easy way for people to gauge their chances of winning, with a certain amount of ticket purchases, prior to playing.

Basically, if a pool is locking 5 seconds from now, it currently has 20,000 tickets in play, and you know you can drop in 20,000 more right before it locks, you can be reasonably confident of swooping in and grabbing a ~50% chance of winning the prize, subsidised by everyone who couldn't afford to buy so many tickets.

Overall though, the average returns won't be greater than you can make by just investing directly through Compound, although in some fringe cases and with a lot of number crunching it may be possible for someone with enough money to find a way of being likely to earn interest faster with PoolTogether than with Compound alone. Still, the incentives to try gaming the system are probably minimal.

Still, that doesn't do much to solve the problem of people with the fewest tickets being unlikely to get any value out of the system in any reasonable timeframe.

Solves

One obvious solution would be to limit the number of tickets any individual can buy, assuming you have a way to prevent the same person from buying a bunch of tickets across multiple accounts.

Of course, once you do that and have ensured that everyone has only a small chance of winning, you basically have something much more like a conventional state lottery. Now, the prize pool is either too small to make a meaningful difference among the participants, or everyone's personal chances of winning within a reasonable timeframe are so low that it's still smarter not to play.

For it to work as intended, it seems the payout each round may have to evolve based on the player count.

But in the end, it will always retain that benefit of paying people back the price of their ticket, to ensure that it really is a lossless lottery. This really goes back to some of the core benefits of blockchain and cryptocurrency: having purely digital, frictionless money and being able to instantly access decentralised financial services to earn interest without incurring the overhead costs of third parties.

PoolTogether probably can't deliver the benefits intended without a whole lot more evolution, but it's definitely a wonderful exploration of the things you can do with digital currency.

It's also an excellent example of how hard it is to escape the trickle-up effect, where power and wealth naturally shift from the poor to the rich unless you specifically implement systems to prevent that from happening – and sometimes even when you do.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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