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The DeFi protocol has been embroiled in a class action lawsuit since last October
DeFi protocol PoolTogether, which offers prize-linked savings accounts, has been embroiled in a class action lawsuit since last October. But now, co-founder Leighton Cusack is raising defense funds in a novel way with a crypto twist — using NFTs.
Defendants include Delaware-based ​​PoolTogether Inc., founded by Cusack, but also Cusack personally, plus investors in the protocol such as venture capital funds Dragonfly, Nascent and Galaxy Digital. The “Pooly NFT” (non-fungible token) comes in a series of 1,110, available at three donation levels. The goal is to raise about $1.5 million of ether in a month.
PoolTogether lets users deposit cryptoassets — chiefly the USDC stablecoin — which are pooled into money market protocols Compound and Aave to generate yield. The interest funds daily random prize drawings.
Each depositor’s odds of winning is proportional to their stake. Unlike a conventional lottery, users can withdraw 100% of their principal, as well as any prize winnings. Otherwise, deposits remain in the pool and are automatically entered into the next drawing.
The concept is a modern incarnation of the mid-20th century “premium bonds” offered by the British government. It encourages saving by offering participants a small chance of winning a large prize. In the case of PoolTogether, a $100 deposit into the Polygon pool today, for example, would offer the player about a 1 in 275 chance of winning a prize. Multiple prizes are awarded each day, starting at $5.
The lawsuit alleges the defendants operate and promote an “illegal lottery” in New York.
The lead plaintiff, Joe Kent, is a software engineer who led a technology team for Sen. Elizabeth Warren’s 2020 presidential bid. The thrust of the suit is overtly political; the complaint notes that Kent “is gravely concerned that the cryptocurrency ecosystem — which requires the use of enormous amounts of electricity — is accelerating climate change and allowing people to evade financial regulations and scam consumers.”
The relevance to PoolTogether is its presence on Ethereum, which relies on electricity-consuming proof-of-work consensus until after The Merge — the completion of its transition to proof-of-stake, which is projected to reduce energy consumption by 99.9%. But PoolTogether has also been available on Polygon since March 2021 and Avalanche since December 2021, both of which already use proof of stake.
The suit also states that “sending cryptocurrency to PoolTogether is remarkably expensive,” and that “because PoolTogether keeps up to 50% of each weekly prize as a ‘reserve,’ which may never be paid out, PoolTogether may never offer a positive expected value.” 
Kent’s alleged harm stems from his fees to use the Ethereum blockchain while depositing a total of $12 of GUSD and USDC stablecoins to PoolTogether. Ethereum has — during periods of high demand — required high transaction fees, but both Polygon and Avalanche do not. In all cases, the transaction fees are external to PoolTogether, which, assuming it operates as intended, always offers participants a positive expected value.
The reserve is used to increase the size of the pool generating interest and is controlled by a DAO (decentralized autonomous organization), which was created in February 2021.
That’s not to say PoolTogether is risk-free — the protocol documentation includes thorough risk disclosures and has done so prior to the filing of Kent’s complaint.
The legal defense NFT campaign has attracted some high-profile support, including from Chris Dixon of Andreessen Horowitz, which purchased one of the 75 ETH (about $148,000) variety.
We just bought a 75 ETH Pooly Judge to support.
Due to the ongoing litigation, Cusack was unable to comment to Blockworks other than to say, “I trust anyone who has familiarity with my work would share my belief that the case is without merit.”
Kent referred Blockworks to his legal counsel, who declined to comment.
To date, the effort has raised about $914,000 toward its $1.5 million goal. If all NFTs offered are sold, they will raise 1,076 ETH, or about $2.2 million as of 1 pm ET Tuesday.
“Litigation is unpredictable,” the website states. “The important thing is to have enough funding to see the lawsuit through until its conclusion.”
This story was updated on May 31, 2022, at 4:00 pm ET.
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