Macauley Peterson

A year and 7 months after it was filed, the case of Joseph Kent v. PoolTogether and its backers has been tossed by a Brooklyn federal court judge.



The central question at issue — whether the PoolTogether protocol constitutes an illegal lottery under New York law — was not addressed, because the judge ruled that the plaintiff, Kent, lacked standing to sue.



PoolTogether was started in 2019 by Leighton Cusack, Brendan Asselstine and Chuck Bergeron. Cusack was named as a defendant in the suit. He <a href="https://twitter.com/lay2000lbs/status/1666470640604311552?s=20">tweeted</a> that he was “extremely happy” with the hearing, though his legal challenges are likely not over.



“There is still a good chance they are going to try and refile this case (or an amended complaint) in state court,” Cusack told Blockworks.



Just over a year ago, PoolTogether’s Cusack <a href="https://twitter.com/PoolyNFT/status/1533515933179953152?s=20">raised $1.5 million for a legal defense fund using NFTs</a> purchased by over 4,200 unique wallets.&nbsp;



Kent, who led a technology team for Sen. Elizabeth Warren’s 2020 presidential bid, filed the complaint in October 2021, with clear political overtones. The original suit noted that he was “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.”



District Judge Frederic Block noted in his 16-page decision that Kent’s lawsuit was based “on an entirely different premise,” but one which could not be adjudicated on the merits, in the absence of any harm in fact.



“By his own admission, he can withdraw his contributions at any time and the fees that those transactions would incur are not imposed by the defendants,” the judge ruled.



Quoting established precedent, Judge Block wrote that federal courts have “the power to redress harms that defendants cause plaintiffs, not a freewheeling power to hold defendants accountable for legal infractions.”



Kent deliberately used the protocol in an irrational manner by depositing a total of just $12 in GUSD and USDC stablecoins to PoolTogether’s pool on Ethereum mainnet. It’s well known that Ethereum has sometimes required high transaction fees, and these were readily apparent to Kent — in fact, they formed part of the basis of his claim for harm.



But PoolTogether also operates on Polygon and Avalanche — and more recently Optimism —&nbsp;where deposit fees are much lower. In all cases, transaction fees are the result of using the third-party networks where PoolTogether’s decentralized app (dapp) is deployed and not paid to the protocol.&nbsp;



As a no-loss lottery — effectively a prize-linked savings account — PoolTogether always offers participants a positive expected value. The protocol earns interest from other DeFi protocols such as <a href="https://blockworks.co/tag/compound">Compound</a> and conducts random prize drawings to pay out the pooled interest to lucky winners. Depositors can always withdraw 100% of their principal, however.



Blockworks has reached out to Kent’s attorneys.



Judge Block concluded that the defendants, which include venture capital funds Dragonfly, Nascent and Galaxy Digital, did not cause Kent any injury. He was not entitled to any interest from his deposits to PoolTogether, even though he could have received interest for deposits made to Compound directly.



“Crucially, the decision to deposit funds with PoolTogether or to send them directly to Compound (or, for that matter, to leave them in his digital wallet) belonged to Kent and Kent alone,” Judge Block wrote.



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PoolTogether class action case dismissed, for now

<div id="highlights-block_62965ba34bd01" class="highlights">
 <ul>
 <li>The no-loss lottery has been the target of a politically-motivated lawsuit from a former staffer for Elizabeth Warren</li>
 <li>PoolTogether’s NFTs have so far raised 463 ETH</li>
 </ul>
 
</div>



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&#8217;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 “<a href="https://www.theguardian.com/money/2019/nov/01/premium-bonds-go-on-sale-for-the-first-time-archive-1956" target="_blank" rel="noreferrer noopener">premium bonds</a>” 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 <a href="https://drive.google.com/file/d/1VlgbQiw8Ac1SyGk6W6o3xw05Pylq9Vz6/view" target="_blank" rel="noreferrer noopener">notes</a> 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 <a href="https://www.blockworksresearch.com/research/the-merge-what-effects-will-it-have-on-eth/" target="_blank" rel="noreferrer noopener">The Merge</a> — the completion of its transition to proof-of-stake, which is projected to <a href="https://blog.ethereum.org/2021/05/18/country-power-no-more/" target="_blank" rel="noreferrer noopener">reduce energy consumption</a> by 99.9%. But PoolTogether has also been <a href="https://medium.com/pooltogether/pooltogether-on-polygon-2730010478b8" target="_blank" rel="noreferrer noopener">available on Polygon</a> since March 2021 <a href="https://twitter.com/PoolTogether_/status/1473383880044462085" target="_blank" rel="noreferrer noopener">and Avalanche</a> 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.”&nbsp;



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 <a href="https://medium.com/pooltogether/perpetual-growth-db101a47791" target="_blank" rel="noreferrer noopener">controlled by a DAO</a> (decentralized autonomous organization), which was <a href="https://medium.com/pooltogether/governance-101-fca9ab8b8ba2" target="_blank" rel="noreferrer noopener">created in February 2021</a>.



That’s not to say PoolTogether is risk-free — the protocol documentation includes thorough <a href="https://docs.pooltogether.com/security/risks" target="_blank" rel="noreferrer noopener">risk disclosures</a> and <a href="https://web.archive.org/web/20210813172059/https://docs.pooltogether.com/security/risks" target="_blank" rel="noreferrer noopener">has done so</a> 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.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We just bought a 75 ETH Pooly Judge to support. <a href="https://t.co/MCxTMIJUI7">https://t.co/MCxTMIJUI7</a> <a href="https://t.co/IhrpOR2WXT">https://t.co/IhrpOR2WXT</a>&mdash; cdixon.eth (@cdixon) <a href="https://twitter.com/cdixon/status/1530295948051525632?ref_src=twsrc%5Etfw">May 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



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,” <a href="https://mint.pooltogether.com/#about" target="_blank" rel="noreferrer noopener">the website</a> 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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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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