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Background
Prize-Linked Savings (PLS) accounts could offer a safe, potentially profitable alternative to gambling according to a recent paper in Management Science. âCan Gambling Increase Savings? Empirical Evidence on PrizeLinked Savings Accountsâ suggests that, based on a case study in South Africa, PLS accounts do not necessarily cannibalize from regular savings accounts, while directly contributing to a reduction in gambling.
Variations on PLS accounts are also beginning to emerge from the Decentralized Finance (DeFi) space from companies like PoolTogether. Often these projects use incentive mechanisms to promote saving and dissuade token holders from engaging in value extraction that might hurt prices or promote unwanted behavior. The following discussion also contains the results of a primary investigation into PoolTogether.
Prize-Linked Savings (PLS): A savings account that adds a periodic prize that is randomly awarded to a recipient(s) at a regularly scheduled interval. PLS accounts may also offer annual percentage yields (APY) in addition to prizes, in this case, the PLS would be offering two separate incentive mechanisms.
Million a month accounts (MaMa): A savings account in which depositors are entered into a monthly âMillion Rand Prizeâ for keeping their savings in a MaMa account.
PoolTogether: A Decentralized Finance (DeFi) project offering a variation on a PLS account, in which various cryptocurrency tokens are pooled into separate contests. Pools may offer differing APYs. Prizes may be awarded weekly or daily.
Key Problem / Topic Area
In âCan Gambling Increase Savings? Empirical Evidence on PrizeLinked Savings Accountsâ, Shawn Cole, Benjamin Iverson, and Peter Tufano looked at PLS accounts in South Africa to assess the effects of the new type of account on the local populationâs banking and gambling behavior. A case study prepared by BTIG, LLC looks at PoolTogether, an example of PLS accounts being used to determine the benefit of rewards on the saving habits of small accounts.
Specific Question or Problem Statement
Can prize-linked savings accounts offer a viable alternative to gambling? Do prize-linked savings accounts cannibalize from regular savings accounts?
Approach / Methodology
The following charts break down the impact of PLS on various aspects of account growth during the South African case study conducted by Cole et al.
Growth Rates of Standard 32-day Savings Before and After MaMa
Savings Balances of Bank Employees: MaMa Users vs. Nonusers
Effect of Winning Prize on MaMa Deposits
Effect of Local Jackpot Prize Winner on Local MaMa Demand
Growth of the MaMa Product
The following charts break down the PoolTogether depositors and their accounts by pool.
Starting Deposits compared to Current Deposits by Pool
Percentage of Depositors per pool
Values of Highest Winning Accounts and Lowest Winning Accounts
Annual Percentage Yield (APY) By Pool
Mean of Winning Account Value Compared to Highest and Lowest Value of Winners by Pool
Reward X Winning Accounts X Number of Depositors X Value of Accounts
SUM of Average Reward Value (last 12) | Type of Reward | ||||
APY (at time of recording) | Number of depositors | Pool | Daily | Weekly | Grand Total |
0 |
42 |
GUSD |
167.42 |
167.42 |
|
42 Total |
167.42 |
167.42 |
|||
0 Total |
167.42 |
167.42 |
|||
1.68 |
1129 |
UNI |
2749.88 |
2749.88 |
|
1129 Total |
2749.88 |
2749.88 |
|||
1.68 Total |
2749.88 |
2749.88 |
|||
1.77 |
389 |
COMP |
8588.25 |
8588.25 |
|
389 Total |
8588.25 |
8588.25 |
|||
1.77 Total |
8588.25 |
8588.25 |
|||
5.95 |
1866 |
POOL |
5077.8 |
5077.8 |
|
1866 Total |
5077.8 |
5077.8 |
|||
5.95 Total |
5077.8 |
5077.8 |
|||
6.08 |
2321 |
USDC |
47749.11 |
47749.11 |
|
2321 Total |
47749.11 |
47749.11 |
|||
6.08 Total |
47749.11 |
47749.11 |
|||
8.62 |
5398 |
DAI |
36193.11 |
36193.11 |
|
5398 Total |
36193.11 |
36193.11 |
|||
8.62 Total |
36193.11 |
36193.11 |
|||
11.69 |
3323 |
USDT |
493.07 |
493.07 |
|
3323 Total |
493.07 |
493.07 |
|||
11.69 Total |
493.07 |
493.07 |
|||
15.93 |
574 |
SUSHI |
4983.57 |
4983.57 |
|
574 Total |
4983.57 |
4983.57 |
|||
15.93 Total |
4983.57 |
4983.57 |
|||
Grand Total |
493.07 |
105509.14 |
106002.21 |
Conclusions / Key Takeaways
The research suggests that PoolTogether may provide similar incentives to a traditional PLS account based on the growth of account balances over time. However, the gas fees associated with entering and exiting a pool may offset any earnings, but upcoming changes to the Ethereum protocol may affect that aspect of earnings in a way that would significantly improve net yield.
Research also indicates that although the weighting of prizes favors the larger accounts, it was fairly uncommon for the largest account in a pool to be awarded a prize more than twice in a row. This suggests that while the mechanism deciding winners is inherently weighted towards larger accounts, smaller accounts winning indicates that the poolâs fairness mechanisms are designed to benefit smaller and medium-sized accounts over the long-term instead of larger accounts in the short term. In this context, the smallest accounts benefit the least due to the odds effectively making it impossible for them to actually win.
There may also be a benefit to using DeFi PLS accounts that use pegged tokens as the definitive token for their pools. In the recent market downturn, accounts with USD-pegged tokens naturally resisted the loss of value associated with market volatility, while pools using unpegged tokens suffered losses of value directly correlated with the market.
CTA: Future Work / RFP
This work looked at a case study and conducted primary research on PoolTogether. Further research on DeFi PLS accounts and the successes or failures of the pools in helping depositors build savings could provide additional context and clarity.