Aliens TLDR

A suit against PoolTogether, a company associated with a blockchain-based app that gamifies savings by cryptocurrency holders, challenges the DeFi community’s claims that its protocols are autonomous and self-governed The emerging world of decentralized finance offers the holders of cryptocurrency many of the amenities of a modern financial system, under the premise that blockchain technology can cut out the middlemen, replacing flesh-and-blood bankers with autonomous, self-governing computer programs.

That is the question being raised by a class-action lawsuit filed in New York federal court against one such novel DeFi service, a cryptocurrency savings application called PoolTogether.

The lawsuit, filed by a software engineer named Joseph Kent, has challenged the legality of PoolTogether’s operation, saying the scheme is essentially a lottery and prohibited under New York law.

According to legal experts, Mr. Kent’s lawsuit could be among the first to squarely address the question of who is legally accountable when a DeFi application—known as a “protocol"—is at odds with the law or causes actionable harm to a user.

Filed in late October, Mr. Kent’s suit named PoolTogether Inc., a Delaware corporation, as well as one of the protocol’s founders and a raft of its investors, as defendants.

In a filing last month, Kevin Broughel, a lawyer for PoolTogether Inc., said the company merely ran a website that provides how-to information for users to access the PoolTogether protocol.

Besides PoolTogether’s governance, Mr. Kent’s lawsuit also raises questions on how its protocol fits into existing U.S. regulatory frameworks.

Mr. Kent, who says he deposited $10 worth of cryptocurrency in PoolTogether in October, has argued the protocol doesn’t qualify as any of the institutions permitted under U.S. law to run prize-linked savings accounts.

PoolTogether “gamblers" have made deposits at least $122 million, according to Mr. Kent’s lawsuit.

The PoolTogether defendants have yet to fully respond to Mr. Kent’s claims.

But Mr. Broughel, in PoolTogether Inc.’s December filing, said his client would ask the judge to force Mr. Kent to arbitrate the matter, or alternatively dismiss the case as a matter of law.

He expressed skepticism of Mr. Kent’s motives, saying his $10 deposit was an apparent effort to create standing for his lawsuit.

Mr. Broughel also argued that the PoolTogether protocol isn’t a lottery, and that deposits made by savers don’t qualify as the purchase of lottery tickets.

Mr. Cusack, PoolTogether’s founder, also has defended the protocol against the lawsuit.