PoolTogether is a prize savings protocol: users deposit tokens, tokens generate yield, and the yield is awarded randomly as prizes to depositors. Also known as a premium bond, it allows participants to have an exciting chance to win big without spending their principal.
Fundamentally, PoolTogether’s value proposition is high-variance yield. Instead of earning their own yield, users have a chance to win everyone else’s yield. To maximize the amount of available yield, we need to combine yield from as many different assets as possible; this will afford the deepest prize liquidity.
The PoolTogether Hyperstructure is a new version of the protocol that combines yield from an unlimited number of assets and awards the yield as prizes in a permissionless, autonomous way. Anyone will be able to add new assets to the protocol, and the prize distribution is fully automatic with no administrator controls. The protocol will be able to scale without any technological or human roadblocks.
This article presents the rationale for a hyperstructure, the high-level design, and the next steps towards implementation.
The term hyperstructure describes a special kind of crypto protocol: one that runs for free and forever, without maintenance, interruption or intermediaries. This “forever software” is made possible because of blockchain technology; if designed correctly, protocols can survive for the lifetime of the blockchain they live on.
However, not every protocol is a hyperstructure. Many protocols have administrative controls or external dependencies that are critical to their survival, which means that the protocol can become inaccessible or inoperative.
The properties of a hyperstructure are virtuous, but they also afford something profound: the ability to scale. Requiring zero maintenance, a protocol can grow without overhead. Being permissionless, anyone can extend and enhance the protocol.
Currently, PoolTogether is controlled by a centralized token voting using the POOL token. By evolving PoolTogether into a hyperstructure, we unlock the ability to scale without limit. The new design eliminates the need for administrative controls and will allow anyone to extend the protocol.
Fundamentally, the hyperstructure is still a prize savings protocol. Users deposit assets, yield is awarded as prizes, and anyone can withdraw at any time.
However, it includes significant improvements:
- The design supports any number of assets and yield sources
- Prizes are adjusted automatically to ensure there are both large and plentiful prizes
- The protocol runs autonomously without any kind of governance
- New assets and yield sources can be added permissionlessly
- The POOL token plays an integral part
The hyperstructure will combine all yield into a single token by continuously liquidating yield for the prize token. This affords two major advantages:
- Supports larger prizes thanks to the combined liquidity
- Allows us to measure the relative contribution of each asset, so that odds may be fairly distributed.
Ideally the prize token is exchange for the asset that the winner desires, such as the deposit token (then they can increase their chances of winning!). However this level of automation is beyond the scope of work for launch. At launch we will support manual exchange by working with POOL governance to establish a strong protocol-owned liquidity position. Protocol-owned liquidity will establish a base redemption price, so that winners can exit to their asset of choice.
Any token can serve as the prize token, but using POOL has certain advantages: most notably it allows us to leverage the protocol’s existing treasury, it aligns incentives between existing POOL token holders and prize winners, and intrinsically ties the POOL token to total protocol yield.
The PoolTogether protocol currently holds approximately $3m USD in stablecoins, and $4m USD in POOL tokens. As part of the hyperstructure rollout, we wish to create a large protocol-owned liquidity position that will significantly improve POOL liquidity and provide a minimum redemption price for POOL.
Deep POOL liquidity will benefit both POOL token holders and POOL prize winners, whether to acquire speculative positions or to exit with their prizes. Having a strong foundation of protocol-owned liquidity will give the hyperstructure stability.
The POOL token will have significantly more utility in the new hyperstructure: initially as the prize token to consolidate yield, but there will be more uses down the road. A strong POOL token will help grow the protocol and foster an ecosystem of POOL utility.
Funds flow through the protocol like so:
- Users deposit a variety of assets into Vaults
- Yield from deposits is liquidated for POOL tokens and contributed to the Prize Pool
- Winners claim their prizes from the Prize Pool
Users deposit tokens into Vaults in order to win prizes. The Protocol will provide a factory for Vaults that implement ERC-4626 and use an ERC-4626 yield source. The standard Vault will be no-loss and expose yield to a Liquidator contract, which will liquidate yield for POOL tokens. The POOL tokens are contributed to the Prize Pool.
Anyone will be able to create Vaults and start contributing POOL to the prize pool, so the protocol can easily expand to include additional assets or yield sources.
The permissionless nature of Vaults does not introduce any cross-asset risk, because assets are totally isolated from eachother. Only yield is combined; and done so in a single, audited, immutable contract.
This marks a significant shift in how PoolTogether manages risk; we will be relying on front-ends to curate Vaults and protect users, rather than have the protocol gatekeep assets. Anyone will be able to integrate their protocol with PoolTogether!
The Liquidator contract liquidates yield for POOL. It’s a single-sided virtual AMM that treats yield as an instant virtual swap before each user swap. As yield accrues, this creates an arbitrage opportunity.
It’s important to note that the above diagram has been simplified; technically the POOL flows from the liquidator back to the Vault and then is contributed to the Prize Pool. Ultimately, Vaults can choose any liquidation strategy they wish.
The Prize Pool is an immutable, autonomous contract that distributes POOL tokens as prizes. POOL liquidity is contributed by Vaults, and the amount contributed determines their weight of the total odds. The Prize Pool can receive prize tokens from any number of Vaults. In this way, the Vaults are part of a prize liquidity network. Anyone can expand the network by creating new Vaults that contribute to the Prize Pool.
Prizes are distributed through periodic “Draws” that include a random number that unlocks that period’s prizes. When the Prize Pool is updated with a new Draw users may begin claiming their prizes. At launch, the source of new Draws will be the PoolTogether V4 Draw Beacon. In the future we’re going to decentralize this mechanism with incentives.
Prizes are structured into tiers: from the largest rare prize to abundant small prizes. The largest prize is tuned to occur statistically once per year, and the smallest prizes every Draw. There is a spectrum of tiers in between the largest and smallest, and the Prize Pool dynamically grows and shrinks the number of tiers to ensure there is always an abundant supply of small prizes.
The PoolTogether hyperstructure does not have any gatekeeping; anyone can add new Vaults without permission. This is a significant departure from the existing protocol, where POOL token holders decide which assets to add. This new approach will allow the protocol to evolve and scale rapidly, but it also introduces new risk: someone could create a malicious Vault or unintentionally add a malicious token.
It will be critically important for interfaces to either curate the Vaults shown, or ensure that users understand the risks they are taking. This is much like the Uniswap app, which warns about illiquid or less commonly traded tokens.
The hyperstructure replaces gatekeeping at the protocol level with curation at the interface level; giving users the freedom to choose their own acceptable level of risk.
The new hyperstructure will launch with several governance controls, which will be phased out as the remaining parts of the system are built. In particular:
- The Prize Pool’s source for new Draws will be configurable, to give us time to properly design a permanent solution. Once the solution is in place we will revoke the privilege to configure the Draw source. For now we’ll be leveraging the existing PoolTogether V4 draw propagation.
- Vaults will have owners whose sole privilege is configuring the Liquidator. This is so that we can tune the liquidation strategy after launch. Once a Vault is stable, ownership can be abdicated.
The hyperstructure will be an entirely new deployment. As such, we will coordinate with the POOL token holders to establish a strong protocol-owned liquidity position and to set up migration incentives.
There are a million things we’d love to add! Some of the more notable additions would be:
- Mechanism that incentivizes users to push new Draws to Prize Pools. This will be critically important to ensure the protocol run perpetually.
- Design vaults that automatically compound prizes back into deposit tokens, so that the users chance of winning is automatically increased. This would afford the same prize experience that users have today!
- Create a simple POOL staking contract that allows arbitragers to flash loan POOL for yield liquidations, and stakers to earn fees.
The above may not be available for launch, but they will be important follow-ups.
The PoolTogether Inc. team is working hard to deliver this new vision. Our next steps are to:
- Publish a technical overview of the new protocol; including the algorithms and analysis. (prior to ETH Denver)
- Develop a go-to-market strategy
- Deploy a testnet (shooting for ETH Denver!)
- Gather launch partners
We’re excited for what we believe is PoolTogether’s final form!