You should consider purchasing a non-fungible token (NFT) to support the Ethereum-based decentralized finance (DeFi) mainstay called PoolTogether. A class action lawsuit against the popular application is currently winding its way through the New York court system, with potentially far-reaching implications for the crypto industry.
Last October, Joe Kent, a software engineer and former staffer for consistently crypto-hostile Sen. Elizabeth Warren (D-Mass.), sued PoolTogether in New York state for allegedly operating an "unauthorized lottery system." And now the company behind the "Pooly" protocol is selling NFTs to fund its legal defense.
PoolTogether is a "no-loss" lottery that allows people to deposit cryptocurrency into a shared pool that reinvests the funds into revenue-generating DeFi products and then pays out those proceeds as rewards to a few lucky "ticket" holders each week. Unlike a traditional lottery, PoolTogether's smart contracts allow participants to get their investments back if they lose the drawing or reinvest in ongoing financial operations.
Even if you don't "win" with PoolTogether, you can't lose. The tool, one of the first decentralized apps to be subsumed under the burgeoning DeFi economy, is a liquidity provider for the industry and a way for crypto owners to potentially be rewarded for owning crypto or participating in these community games.
Before filing his lawsuit, Kent deposited $10 in cryptocurrencies into the log. He claims that the application, developed by Delaware-based PoolTogether Inc, supports an illegal form of gambling. New York state law allows purchasers of unregulated lottery tickets to bring class action lawsuits on their behalf and on behalf of other ticket holders.
There is one small issue unique to PoolTogether and how it fits under existing financial regulations. The company's lawyers have argued that PoolTogether is not a lottery, but rather a premium bond - a savings account with a prize attached that reduces investment risks. Banks and credit unions in the U.S. have been authorized to offer these services since 2014.
The larger issue, however, touches the entire crypto world. Essentially, the lawsuit is about decentralization and the responsibility that software developers bear once crypto applications go live. "It aims to test the question of whether creators can make something, publish it on a blockchain and really claim to no longer control it," wrote Brady Dale of Axios.
Once smart contracts are launched, they can't be edited. And like other DeFi tools, PoolTogether has sought to allow its users to participate, control and direct the protocol by issuing its own crypto token called POOL.
Legal liability?
Kent has also filed suit against PoolTogether founder Leighton Cusack and a number of the protocol's investors, including Dragonfly Capital, Compound Labs and Galaxy Digital - raising questions about who is legally responsible in cases of "harm" in the crypto world. His complaint also criticizes the environmental impact of cryptocurrencies and the fraud culture that thrives in the industry.
His concerns are valid, and there is a need to create ways to crack down on crypto founders who are doing real harm. Figures like Terra's Do Kwon should take responsibility for the damage they cause when things go wrong, especially when they retain technical control and influence over a protocol.
Kent's particular case, however, is frivolous and aims to undermine the fundamental principles and value of the crypto industry. Decentralization is a spectrum that will largely take time to achieve. Cryptocurrencies have the potential to enrich the world by removing gatekeepers and intermediaries from some financial and cultural services.
DeFi is experimenting with the idea that tools can be built and successfully handed over to their communities. This is a departure from the world of traditional financial services, but a method that has long been used in the development of open source software. The claim that Cusack is forever liable for his app undermines the main goals of cryptocurrency.
Just as Bitcoin was developed by Satoshi Nakamoto and made available to everyone, the same could be true for other blockchains.
Cusack has argued that the PoolTogether tool is an open-source and unpledged protocol. The eponymous PoolTogether company has contributed to the development of the open source code and maintains a web interface at pooltogether.com, but does not profit from the PoolTogether protocol, which would continue to exist without its presence.
Nevertheless, the company has raised funds and has significant exposure to the POOL governance token - all on purpose. DeFi allows builders to take the risk of investing time and effort into building token-backed tools in hopes that their assets will increase in value through increased usage and speculation. Today, POOL is worth about $1, a significant drop from $26 at launch.
Cusack is also at the center of the legal fundraiser, which is expected to raise 769 ETH (about $1.5 million) through the sale of NFTs. Proceeds from the sale will go to PoolTogether Inc. and will be "used for the legal expenses of the company and its officers and directors," while the remaining assets will be used for "other business purposes," according to the campaign's website. So far, about 460 ETH have been collected.
While there are legitimate questions about decentralization and securities regulations for tokens, the rules are clearly spelled out. People can participate and take a risk if they want, because these protocols are supposed to be open source. Kent said he risked about $12 in PoolTogether.
The real crime may be the $400 in ETH Kent spent in gas fees to get on the app.