A new lawsuit is putting the principles of DeFi to the test and could define the future for the nascent sector

  • A new lawsuit has been filed against Pool Together, a cryptocurrency savings company that gamifies the savings accrued by crypto holders.
  • The lawsuit against Pool Together could define the future of the sector and if the protocol loses, it could spell doom for DeFi as it takes off.

Decentralized finance is soaring. And while much of it is down to the utility that DeFi offers, there’s also a lot that’s got to do with the uncertainty, ambiguity, or total lack of guidelines for the sector. This, however, could all change soon, with a new lawsuit filed by aggrieved investors set to test the ethos and principles upon which DeFi has been built.

The lawsuit is filed in a New York federal court and it’s against Pool Together, a cryptocurrency protocol that takes its users’ deposits, lends them out to other users, and pays back interest, much like BlockFi and Celsius do.

However, while the lending has landed BlockFi and Celsius in trouble with U.S regulators, the latest lawsuit isn’t concerned about those. Rather, it’s the interest that Pool Together is paying, or more specifically, how it’s paying it.

Pool Together presents itself as a “no-loss lottery.” Essentially, it does everything BlockFi does but instead of paying the users their deserved interest, it conducts lotteries and hands the collective interest to a few lucky users. Its founder, Leighton Cusack even prefers a different name – “a prize-linked savings account.”

Pool Together is built on Ethereum using open-source code. Cusack, the founder, doesn’t exercise authoritarian control over the platform. Instead, users who participate in liquidity provision by lending their crypto earn native platform tokens which they then use to vote for the direction they wish the protocol to take. These governance tokens are accrued even if a user never wins the lottery. They can be sold like any other crypto on exchanges and their value shoots up and down, just like Bitcoin or Ethereum does.

Pool Together has shot up since it was founded and holds hundreds of millions of dollars in the smart contracts, paying over $100,000 in prizes (or collective interest) per week to lucky winners.

And while more investors have piled onto the platform, not all of them have been as impressed, and one of them is suing the protocol.

The DeFi lawsuit targeting Pool Together

In the lawsuit, the investor, known as Joseph Kent argues that despite billing itself as a DeFi platform, Pool Together is a lottery, and it’s prohibited in the state of New York.

Kent is a former tech lead in the failed Elizabeth Warren 2020 presidential campaign.

While the lawsuit targets the lottery that happens every week with Pool Together, which it says is illegal, it will also be key in determining what regulators think about DeFi. For one, it will establish if an individual should be held legally accountable for the actions of a DeFi platform. In this case, Cusack says that Pool Together is run by the token holders.

Carlton Green, attorney for Crowell & Moring LLP and a former anti-money laundering regulator told the Wall Street Journal:

It remains an open question as to how courts and regulators will respond to these unique features of DeFi.

The Pool Together team, and their investors, maintain that the lawsuit is frivolous and is driven by political ambitions and a lack of understanding of DeFi.

Cusack blasted the lawsuit, stating:

This is filed by someone who works in politics and the stated motivation is that cryptocurrencies are bad for the environment. It’s clearly written by someone who doesn’t understand how protocols operate or even what the pool as a whole is all about.

About Author

Steve has been a blockchain writer for four years, and a crypto enthusiast for even longer. He is most excited by the application of blockchain to solve the challenges facing developing nations.

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