Category: DeFi

Money-focused crypto projects tend to fall into one of three categories. Extractive ones like pump.fun are almost always moving resources toward a small number of people, usually from latecomers who don’t know better to insiders who prey on them. Neutral ones like Uniswap are simply infrastructure, they can be used in extractive ways, but can just as easily be used to help. There’s also a third category, that I think of as prosocial projects, ones that are actively trying to do something useful for people outside the system.

There’s been a lot written on the first category, less on the second, and almost nothing on the third. I believe that’s in part because the projects that fit into this category aren’t focused on speculation, which tends to drive attention in the crypto space. That speculation is driven by the desire for asymmetric upside, which can be tempting for anyone, but especially for people who don’t have resources to work with in the first place.

A lot of people play the lottery. The standard advice is to put that money in a savings account instead, but that advice doesn’t work in reality. A high-yield account right now gets you around 3 to 4% in yield. Someone spending $10 a week on lottery tickets isn’t going to be moved by the math that says if they save for 10 weeks they’ll earn $3 more a year. The number is too small and the psychological appeal isn’t there. The lottery is appealing because it’s one of the only ways someone can realistically see themselves getting an outsized outcome from where they are.

Two examples of projects that I think fit into the prosocial category are PoolTogether and HaloFi (formerly known as GoodGhosting). Both took direct aim at this problem, in different ways.

PoolTogether was a project designed around the idea of a lossless lottery. Participants deposit money into the protocol in exchange for raffle tickets. The lottery still happens, but the pot that the rewards are paid out of comes from the collective interest on the entire pool of money deposited into the protocol. At a large enough size, the interest that communal pot generates is significant, and you still have a chance at winning a portion of it. Meanwhile, your tickets aren’t used up week to week, and your money can still be removed from the principal at any time by swapping your raffle tickets back, so you can’t ever lose the money you put in.

PoolTogether was doing this, and had real momentum. At its peak, it had just over $230 million in deposits generating interest that was given out in weekly lotteries. There were real success stories too, with one user who deposited $74 winning just under $40,000 on their deposit, which they could still get back afterwards.

HaloFi took a different approach. Instead of a lottery, it tried to focus on building steady savings habits by making saving competitive. Challenges would be set with savings goals and time periods. For instance, one might be to save $100 over 10 weeks, with weekly deposits of $10. Similar to PoolTogether, any money deposited would go into a communal pool used to generate yield. At the end of a challenge period, if you kept up with your deposits, you got your entire deposit back, along with a proportional share of the yield generated. If you didn’t manage to make each payment, you still got your entire deposit back, but the yield that you would be entitled to is instead distributed evenly to those who did complete the challenge. You could also withdraw your money at any point before the challenge was over. The mechanism worked, people didn’t want to give up their yield, and kept coming back to make their deposits. There were success stories here too, with more than four million dollars being saved.

Unfortunately, neither of these stories end well. PoolTogether was taken to court by a man named Joseph Kent, who alleged they were running an illegal lottery that was hurting its users. His standing for the case was that he deposited $10 in the protocol, and transaction fees during the deposit had already outpaced any expected returns. What wasn’t mentioned was that he intentionally used the least efficient method of depositing his money, choosing to pay the maximum amount he could. While PoolTogether offered ways to deposit into the protocol for fractions of a cent, Joseph simply did not use them. The case was eventually dismissed, but it took community fundraising to pay the fees for years of a protracted legal battle, from 2021 till its dismissal in 2023. By this time, the protocol had lost its momentum, and along with the volatility in the overall market, it faded from prominence.

Something worth noting here is that Joseph Kent is not your average user. He was the technology team lead for Elizabeth Warren’s presidential campaign in 2020, and Warren has made opposing crypto a consistent part of her political platform. I can’t say for certain that this was coordinated, but the people most motivated to see this project fail had direct ties to the lawsuit that did it.

HaloFi’s end was quieter. The mechanism worked, and the users were there, but there was no viable path to funding the business itself. Any fee they could take from the generated yield was too small to matter operationally, and would have come directly out of what users earned. In late 2024, they announced they couldn’t secure another funding round and were shutting down. This brings us back to the problem with a space so heavily driven by speculation. It isn’t just everyday people chasing asymmetric upside, venture capitalists and investors are looking for it too. A prosocial project designed to slowly and safely build wealth for its users doesn’t offer a 100x return to early investors, which makes raising money to survive as a business in the space incredibly difficult.

These were two projects trying to do something useful for people outside of the system. HaloFi is gone, and while PoolTogether technically survived its legal battle, it exists as a fraction of its former self. But the underlying mechanisms worked. A $74 deposit winning $40,000 and four million dollars saved are real-world benefits. If there was more interest from investors and less hostility from regulators, there’s no reason ecosystems like this couldn’t thrive.

It’s January 1st and you’re a farmer that is trying to plan your business for the rest of the year. With current estimates, you think your orange trees will produce 50 bushels, worth $5000. However, there was a late freeze last year which destroyed half of your crops. You’re concerned that this could happen again so you want to find a way to hedge your risk. You draw up a contract that represents rights to all of the oranges that your trees have grown by June 30th and look for a buyer. Someone might buy your contract for several reasons. First is that you might be willing to sell the contract for less than $5000 but more than $2500. This would protect you from the kind of downside you faced the year before, while if everything goes as predicted the buyer will make the difference between $5000 and the price of the contract. A second possibility is that the buyer of the contract believes the price of oranges will increase by the time of harvest, making the 50 bushels worth $6000 instead. Similarly, they could also expect the price to remain the same but the trees to produce more than 50 bushels. In all three situations, you hedge your risk by collecting your money up front, while the buyer takes on some risk over a longer time horizon for more benefit. The buyer of the contract can freely trade it afterwards as well, and many trading opportunities can occur as people have different opinions on how many oranges will be harvested and/or what the price of oranges will be in 6 months. 

A month later, you decide that you want to get out of orange farming all together. You’ve already promised the oranges that will be grown are owed to the holder of the first contract, so you can’t sell your trees immediately. Instead, you draw up another contract, which entitles someone to all the trees in your orchard on July 1st. To make up for the time that they won’t be able to take possession of the trees, you sell the trees for less than they would be worth at current market value. In this situation, you free up capital early to reinvest into something else, while the buyer gets a discount on the trees they want, as long as they’re willing to be a little patient. In this situation too, the buyer can trade their contract as they see fit, and the final holder will be the one that takes possession of the trees on the date of expiration.

When generalized, you can call the orange trees the principal, and the oranges themselves the yield. Any asset that passively accrues some value can have this framework applied to it, as people use their own assumptions and modeling to determine how much income an asset will generate and how to value both that income and the asset itself.

You’re at the market and want to buy some apples. In the middle of the market, there’s a big book that people can record things in. People that want to buy apples write down how many they want and at what price they’re willing to buy, and people that want to sell apples do the same in reverse. A trade happens when a buyer and seller agree on a price and quantity.

This is the standard central limit order book (CLOB) system that most stock brokerages use. In big markets dealing with popular assets like apples, there are usually also businesses built around constantly filling both sides of the book to keep the market liquid. These businesses require significant capital, and generally only focus on the largest markets.

So what happens if you actually want to buy oranges, and there isn’t a company willing to be a market maker that fills both sides of an order book? The issue isn’t a lack of buyers or sellers, or that the price isn’t determinable, it’s that trading gets tricky when there aren’t many offers on either side. An orange might truly be worth $2, but if the buy side only has an order for $1 and the sell side only has an order for $3, anyone that wants to buy or sell an orange is going to have to be out a dollar.

One way to solve this is by creating a marketplace that doesn’t need an order book, and instead lets trade happen at any time by setting pricing according to an algorithm.

Imagine in this same market, the book in the middle gets replaced with a magic scale. The scale has a spell on it such that the two sides must always be balanced, and that the number of objects must always multiply to a fixed number set when the scale was calibrated. Taking the same example of oranges, let’s say the scale gets set up when oranges are $2. Someone puts 5 oranges on one side, and 10 dollar bills on the other. People can buy and sell oranges at any time, as long as the number of oranges times the number of dollar bills is equal to 50, the scale stays balanced. When you generalize the concept, you can use a formula like x * y = k, where x and y are the units of each asset and k is a constant value. 

Going back to our oranges, if I want to buy 3 oranges, I take 3 from that side, leaving 2. To know how much those oranges are going to cost, we can do the math of 50 (the constant target) divided by 2 (the number of oranges left). This means that there would need to be 25 dollar bills on the other side to keep things equal. There are already 10 dollars there, so I would need to pay 15 to rebalance the scale. You might notice that the price of the oranges here isn’t 2 dollars, but rather 5. This difference is called price impact. It happens when you try to make a large trade compared to the amount of liquidity available. Since there are only 5 oranges, buying 3 is taking up more than half the supply, which naturally moves the price much higher.

On the flip side of that, let’s say I want to sell 5 oranges instead. We start with the 5 on the scale, add 5 more to get 10, and then divide 50 by that to get 5. Since there are 10 dollars on the other side of the scale, I need to take 5 to get back to a balance. The same principle of price impact applies here, just in the other direction.

The effect of price impact is reduced when there are more people willing to add both oranges and dollars to each side of the scale. If the scale had 5000 oranges on it, removing 3 wouldn’t require much change on the other side. The people who add both oranges and dollars to the scale are called liquidity providers, and the assets they provide are collectively called a liquidity pool. When you make a trade through this pool, you pay a small fee, just like you would on a brokerage platform. In this case, the fee is split proportionally between the liquidity providers. This fee gives liquidity providers a way to earn money for keeping the system running smoothly.

In both of these directions, people can continue to buy and sell oranges to an infinite amount. So, while traditional markets need buyers and sellers to line up their prices, an AMM system lets anyone trade anytime.