The case for decentralized gambling

Decentralized Gambling Sites Feature

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The gambling industry is rarely commended for its contribution to the advancement of technology. Think about it. The industry has gone through a major digital transformation over the past 10-15 years. In what started out as a space dominated by land-based casinos has since made the transition over to the digital arena. First, we had online operators, then we went mobile, then we went crypto-centric, and now we are looking at the next potential move – decentralized gambling. 

The idea is simple – by removing the middleman (i.e. the casino), players can instead gamble on a peer-to-peer basis. Everything can be fully supported by smart contract technology, meaning that users can choose to be the player (at a reduced house-edge) – or make guaranteed returns in the form of the banker (albeit small returns). It’s essentially a win-win situation.  

As such, if you’re interested in finding out more about the case for decentralized gambling – then we would strongly suggest reading our opinion piece. Within it, we start by explaining exactly what decentralized gambling actually is, followed by a discussion on the many problems it could solve and ultimately, how it could benefit you as a player.

What is decentralized gambling?

In its most basic form, decentralized gambling follows the same principle as any other decentralized system – it removes the need for a middleman and instead paves the way for peer-to-peer transactions. In the case of currency, decentralized cryptocurrencies allow people to exchange value without a third-party. And in the case of gambling? Players can gamble without needing a third-party.

As with any decentralized system, this affords players with a number of key benefits. Of these benefits, let’s first look at the house edge.

Reduced house-edge

If you’re a seasoned gambler, then you’ll likely have a rough idea of what the house-edge is, and how it generally works. If not, the house-edge is essentially the statistical long-term advantage that the casino has over you. More specifically, the house-edge differs depending on the specific game that you are playing, and it ensures that the respective casino always makes a profit in the long run. 

Let’s take roulette for example. If you were to play European roulette, you would have 36 numbers (ranging from 1-36) and a single green zero. This means that in total, the roulette wheel will land on one of 37 potential outcomes. If you were to place a $100 outside bet on red, you will be offered odds of ‘2.0’. This means that by landing on red, you’ll double your money. Failure to land on red will result in an outright loss. 

Although you are being offered odds on a 50/50 basis, the specific chances of the ball landing on red are not 50/50. This is because you also need to factor in the green zero. Ultimately, this represents a house-edge of 2.6% in favour of the casino, because you have 16 reds out of a total of 37 numbers. American roulette is even more damning for the player, not least because the use of two green zeros results in a house-edge of 5.2%.  

Do you think that this represents good value for the player? We would argue that it doesn’t. However, we would also argue that there does need to be a house-edge of some sort, otherwise there would be no reason for the casino to be in business. 

With that being said, a decentralized gambling platform that is backed by a rock-solid algorithm would allow casino games to reduce the house-edge. As the algorithm is supported by software, the smart contract can essentially dictate any house-edge that it sees fit. This leads us on to the next point of creating a whole new side to online gambling – acting as the banker.

Fancy being the banker?

If I were to tell you that you were able to make a guaranteed profit of 1% per month by simply locking some of your cryptocurrencies away, you’d probably think that I was behind a Ponzi Scheme like Bitconnect or OneCoin, right? Don’t worry, that’s not the case at all. But, what I do think has the potential to open up the doors to long-term, guaranteed profits is that of decentralized gambling. 

If we were to go back to the discussion on the house-edge momentarily, you’ll remember that this ensures that the respective casino makes a guaranteed profit in the long-run. While the casino and the player will both go on winning and losing streaks, over the course of time the casino will always remain in front. That’s the whole point of the house-edge.

However, decentralized gambling takes the power away from centralized casinos, and instead, puts it back into the hands of everyday users. For example, let’s say that you were playing a game of European roulette at a decentralized online casino. Ordinarily, you would expect the casino to possess a house-edge of 2.6%. Although this isn’t ideal, that’s just the name of the game. However, how would you feel if the underlying smart contract at your chosen decentralized gambling site reduced the house-edge to just 1%? You’d be delighted, right? Of course!

Now let’s flip my example slightly. How would you feel if the 1% house-edge wasn’t collected by a major casino company, but instead by everyday consumers? Well, this is exactly what decentralized gambling could facilitate. Let’s unravel this in more detail in the next section.

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Everyday users make money, not multinational casinos

In the above section, we noted how a decentralized gambling game could lower the house-edge of European roulette via a pre-programmed smart contract. This means that over the course of time, players would lose 1%. However, there is no hard-and-fast rule as to when this 1% advantage will occur, as it is based over billions and billions of individual spins. 

In other words, there is no knowing if on the next spin the player will win or lose. In fact, the player could just as easily go on a super-long winning streak where they win ten times more than what they started with. If this does happen, which it always will at some point in time, who is going to cover the withdrawal? After all, smart contracts are designed to release payments in an autonomous manner. 

In the case of a decentralized roulette game, the player would need to receive the winnings automatically as soon as a win is landed. For this to occur, the smart contract and more specifically – the decentralized gambling game, requires ‘cash flow’. This is no different from a traditional online casino needing to have a certain amount of cash-on-hand to ensure it can honour winning bets. 

I would argue that the one and only solution to this conundrum is to open the doors to everyday investors. Think of it like a reverse crowdfunding scheme. Players  – or ‘bankers’ as we will refer to them hereon, deposit a certain amount of cryptocurrency into the smart contract. 

In return for keeping the cryptocurrency locked up for say 6 months, the smart contract will distribute a percentage of the 1% house-edge back to the banker, at a rate proportionate to the amount invested. In other words, if you are responsible for 10% of the total cash flow pot, you’ll get 10% of the house-edge.

Once again, it is a win-win situation for both the player and the banker. On the one hand, the player has been able to reduce the house-edge on European roulette from 2.6% to just 1%. To clarify, this can be achieved on any casino game – not just European roulette. At the other side of the transaction, the banker is making a sweet return in the form of a house-edge that is guaranteed by a smart contract. 

Decentralized code is king

One of the biggest pain-points of playing at a traditional online casino is the never-ending red tape that players are accustomed to. This largely centres on KYC (Know Your Customer). For those unaware, KYC laws require online casinos to identify each and every player that uses their platform. At a minimum, this will require a government-issued ID and proof of address, although it can often require more. 

The key point here is that players are forced to provide heaps of personal information and sensitive documents just to be able to gamble online. This is why cryptocurrency casinos are becoming more and more popular – not least because they do not ask for anything other than an email address – and certainly no documents. 

However, it is important to remember that as revolutionary as crypto-centric casinos are (instant withdrawals, no KYC, lower-house edge, etc.), they are still centralized operations. In other words, the crypto-casino in question has a finger on the button at all times. Should they find a reason to limit your account, you stand the very real chance of having your balance revoked. While we are yet to see any cases of this ourselves, it’s still a very real risk that needs to be considered. 

On the other hand, players will never need to worry about the threats of red tape and centralized limitations when playing at a decentralized gambling site. Don’t forget, the concept of decentralized gambling ensures that ‘Code is King’. The underlying smart contract conditions are not only publically available for all to see, but once the contract has been executed, it cannot be amended or manipulated. 

This means that regardless of what happens, there can be no malpractice from either the player or the casino game itself.

Room for innovation

As we briefly mentioned in the previous section, the online gambling industry is fraught with red tape. However, what we haven’t discussed yet is that these regulatory burdens even extend to software developers. To give you a bit of background, software developers that provide casinos with games must be in possession of a gaming license. This will need to be issued by the gaming body that governs the jurisdiction (or region) in question. For example, while the Gambling Commission is responsible for governing the UK market, the likes of the Malta Gaming Authority and Gibraltar Gambling Commission regulate the wider European markets. 

The key point here is that the software side of the industry is dominated by a select number of established developers with vast resources behind them. This ultimately means that small, independent developers simply do not get a look in.

On the contrary, due to the immutable characteristics of the smart contract protocol, there is no requirement to have a third-party watchdog overseeing the industry. Once again, games are supported 100% by a transparent smart contract that cannot in any way shape or form be amended once executed. This in itself acts as an industry watchdog, without needing manual intervention.

As such, niche developers do not need to go through the hugely expensive and cumbersome process of obtaining a regulatory license. Instead, they can design and launch casino games as and when they see fit. Sure, there is no quality control mechanism in place per-say, but players will have the final say on what games they play. Wise developers will not only ensure that the game itself comes with innovative graphics, sound effects, and anything else that the modern-day player craves, but also that the underlying smart contract is water-tight.

Regulators gonna regulate

The lack of comprehensive regulation for blockchain casinos raises both opportunities and concerns within the online gambling space. Blockchain casinos, often operating in a decentralized manner, encounter a regulatory landscape that hasn’t kept pace with the rapid evolution of this technology. While the decentralized nature enhances user privacy and eliminates certain bureaucratic hurdles, it also creates challenges related to consumer protection, fairness, and responsible gaming.

The absence of clear regulatory frameworks may expose players to potential risks, including fraud or unscrupulous practices. Striking a balance between fostering innovation and safeguarding user interests is crucial. Regulatory bodies are grappling with the task of adapting existing frameworks to encompass blockchain casinos, ensuring fair play, transparency, and adherence to responsible gaming standards while acknowledging the decentralized ethos that underpins these platforms.

The ongoing dialogue between the industry and regulators remains essential to establish a robust regulatory environment that promotes both innovation and user protection.

Decentralized gambling: The verdict?

On the one hand, it is true that the online gambling industry has come a long way over the past two decades. Not only have we made the transition from land-based to desktop, but we’ve also gone mobile. Moreover, with the ever-growing rise of crypto-centric casinos, players are slowly but surely regaining control.

However, we would argue that the online gambling industry still has a long way to go before it creates a more level playing field. Crucially, the phenomenon of decentralized gambling has the potential to solve a lot of problems that still exist in the online space. 

Whether that’s through reduced house-edges, the chance to become the banker, or by embracing niche developers – all of this can be achieved without the need of a third-party operator. 

Ultimately, we would argue that it is simply a case of when, as opposed to if decentralized gambling takes off. 

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Jop N.

Jop has been a crypto enthusiast since 2014, and as the founder of ETH Casino, has been writing about the space since 2017. With a background in igaming, he is uniquely qualified to shed his light on everything Ethereum gambling related.

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