One of the largest sectors to be impacted by the revolution of Ethereum and its underlying smart contract protocol is the decentralized gaming space. While the crypto-centric side of the industry is still minute in comparison to the traditional arena, player acquisition levels are growing year-on-year nonetheless.
However, in its current form, the Ethereum blockchain is still fraught with flaws. Notably, this includes an inability to validate more than 16 transactions per second, and a fee-system that requires a major overhaul. Although these issues are not conducive to an online casino space that requires a significant throughput of transactions, a solution is finally on its way.
This solution comes in the form of Ethereum 2.0, which will see the blockchain project make its much-anticipated transition from proof-of-work (PoW) to proof-of-stake (PoS).
Fancy finding out how Ethereum 2.0 will affect the decentralized gambling market? Be sure to read on.
What is Ethereum 2.0?
Before we explore how the technical transition will impact the decentralized gambling industry, it is important to explain what Ethereum 2.0 actually is.
In its most basic form, Ethereum 2.0 – also referred to as ‘Project Sapphire’, will see the Ethereum blockchain upgrade its consensus mechanism. For those unaware, a consensus mechanism is the technology that allows blockchains to remain decentralized. More specifically, it dictates the method used to validate transactions, as this will vary depending on the blockchain in question.
Much like in the case of Bitcoin, Ethereum utilizes a consensus mechanism known as proof-of-work. Although there is a slight variation between the proof-of-work mechanism used by Ethereum and its older counterpart, it is arguably not fit for purpose.
Not fit for purpose
The reasons for this are three-fold. Firstly, proof-of-work in highly inefficient, insofar that it requires an obscene amount of electricity to operate effectively. Secondly, these inefficiencies lead to high operational costs, which is why miners often located in countries with super-cheap energy prices. Thirdly, and perhaps most importantly – proof-of-work is hindered in the scalability department. At the time of writing, Ethereum is able to confirm just 16 transactions per second. When you consider that the likes of Visa and MasterCard are able to facilitate tens of thousands of transactions per second, Ethereum is not fit for mass adoption.
This is where Ethereum 2.0 comes in. In a nutshell, the Ethereum blockchain will soon be making the transition from proof-of-work to proof-of-stake. Not only will this facilitate much more energy-efficient transactions, but throughput will be amplified by some distance. In fact, it is estimated that Ethereum 2.0 will take the blockchain from just 16 transactions per second, up to a staggering 4,000 transactions per second.
Although there is much more to learn about the specifics surrounding Ethereum 2.0, this is beyond the remit of this article. Nevertheless, in the next section we are going to explore the current state of play in the decentralized gaming space.
What is decentralized gaming and why does it matter?
We briefly mentioned at the start of our article that the Ethereum gambling space is growing at new heights year-on-year. In its current form, much of the industry is dominated by centralized operators that accept decentralized currencies. In other words, although the Ethereum blockchain itself is decentralized, major crypto-centric operators are centralized. This is because a third-party is required to facilitate most of the end-to-end casino experience.
However, although still in its infancy, decentralized gaming is now a thing. The overarching concept is that a third-party operator is no longer required to operate casino games. On the contrary, players can gamble directly with other users, meaning that the role of a casino as we know it is no longer valid.
For example, let’s say that you want to play a game of blackjack. First and foremost, a developer would need to create a blackjack game that is backed by Provably Fair. This is the protocol that guarantees fairness in a transparent manner via cryptography. Once the blackjack game has been created, we then need to think about how bets will be facilitated without a centralized operator.
This is where things get interesting. To make the decentralized casino phenomenon work, you effectively need two parties. On the one hand, you have the player that wishes to play blackjack. The process would be no different to a conventional game of blackjack, insofar that the player gets to choose their stakes, as well as their hand decisions.
At the other end of the spectrum, you need somebody to accept your bets and honor any subsequent winnings. In the case of decentralized gambling, the role of the ‘banker’ can be filled by anyone that wishes to do so. In a similar nature to peer-to-peer crowdfunding, users could contribute as little or as much cryptocurrency as they wish to the blackjack ‘fund’. As the underlying developer has a fixed house-edge installed, long-term profits are all-but guaranteed.
And there you have it – a decentralized game of blackjack without a third-party. In fact, the above concept rings true on all casino games that can be represented by software.
How would decentralized Ethereum gaming work?
So now that we’ve uncovered the concept of decentralized gambling, we need to figure out how the process would work in practice. Crucially, if no third-party is in existence to validate and settle bets, who will? Well, the answer to this question is not a person or company; rather, an Ethereum smart contract.
Ethereum smart contracts are nothing short of revolutionary, as they allow unknown parties to transact on a trustless basis. This is because smart contracts follow the ethos of “Code is Law”. In layman terms, once the smart contract has been deployed, the underlying terms cannot be amended.
Instead, the smart contract will perform an action when pre-defined trigger points have been met. All of the terms outlined in a smart contract are publically available without revealing the identity of the transacting parties, which is crucial in the context of online gaming.
Back to the discussion of decentralized gambling, the Ethereum smart contract can perform all of the functions that a traditional online casino would typically execute. For example, deposits and withdrawals can be settled instantly and autonomously – as could bets.
Sticking with the example of decentralized blackjack, the underlying software would know whether or not a particular game went in favor of the player, or the banker. If it’s the former, then the smart contract would distribute the winnings into the player’s Ethereum wallet.
It would do so autonomously, with no requirement to engage with an intermediary. If it’s the latter, then the funds would simply be sent to the wallet(s) of the banker, or group of bankers. Once again, there is no requirement for a third-party actor.
However – as great as all of the above benefits sounds, there is one flaw that must be addressed – Ethereum 1.0.
Ethereum is both perfect and imperfect for decentralized gaming
Towards the start of this article, we discussed how proof-of-work was hindering the Ethereum blockchain. Notably, this centers on an inefficient transaction validation process, high fees, and most importantly – an inability to scale more than 16 transactions per second.
These performance levels are highly unfavorable for an online gaming industry that requires a significant number of transactions to operate. We’re not talking about deposits and withdrawals – that’s the easy part. On the contrary, we are talking about specific gameplay.
For example, think about the process of playing an online slot machine. As per the underlying software that governs the slot, each and every spin is a separate transaction. This throughput is further amplified once you start to consider in-game specials, such as bonuses, feature rounds, and scatter symbols. You then need to multiply these transaction requirements by thousands, if not millions of players worldwide.
Could an Ethereum blockchain that is limited to just 16 transactions handle the above throughput? Absolutely not. The end result in its current form would be delays, delays, and more delays. And what happens when the Ethereum blockchain experiences high levels of traffic? Transaction fees begin to rise – and quickly.
As such, not only would the Ethereum blockchain be stuck in a never-ending backlog of gaming transactions, but each transaction would require a significantly high fee. We saw this in late 2017 when virtual game CryptoKitties exploded in popularity. At one point, the game was responsible for 10% of all Ethereum transactions, which not only resulted in network delays, but sky-high fees.
The good news is that the above flaws could soon be a thing of the past, thanks to Ethereum 2.0.
How will Ethereum 2.0 take decentralized gambling to the next level?
As we briefly noted earlier, the proof-of-work to proof-of-stake transition will potentially see Ethereum take its scalability capacity from 16 transactions per second, up to 4,000. If the upgrade is successful, this would represent a transactional increase of almost 25.000%.
As a result, the decentralized gambling industry would have the required capacity levels to meet the demands of online gamers. With that said, the improvements do not stop there. Crucially, Ethereum 2.0 gambling sites will benefit from an innovative inflation policy.
While opponents of such a policy will argue that this mirrors real-world fiat currencies like the US dollar and Euro, there is one key difference – inflation will be capped. Nevertheless, the reason that inflation will be highly beneficial to the ever-growing Ethereum casino scene is with respect to fees.
This is because the newly created ETH that the inflation policy derives will go towards those responsible for mining transactions. In its current form, individual users are required to cover the costs of sending funds. This is also the case with smart contracts. Every time a transaction is deployed via a smart contract, this requires a transaction to be posted to the blockchain and thus – validated by a node.
As we discussed just a moment ago, online casino games require a significant number of individual transactions to operate, which subsequently makes it unviable when you take fees into account. Instead, each decentralized gambling transaction can be paid for via the inflated supply of ETH.
More flexibility in programming languages
While the main benefits of Ethereum 2.0 for the decentralized gaming industry will center on efficiency, scalability, and fees, it is also important to consider the underlying programming language. At the time of writing, Ethereum 1.0 forces developers to create smart contracts in its own native language – Solidity.
This is somewhat problematic for experienced developers that are used to writing programs in more mainstream languages. Therefore, the only option available is to learn the ins and outs of Solidity, which is no easy feat. More specifically, this has hindered the decentralized gambling industry because it limits the number of high-end games that are available on the market.
However, this is where Ethereum 2.0 once again steps in. As per the Ethereum team itself – it is believed that the network upgrade will permit languages in addition to just Solidity. While the specifics are still a work-in-progress, Ethereum notes that developers will be able to write in any language that complies with WASM (WebAssembly).
Ethereum 2.0 and decentralized gaming: The Conclusion?
In summary, although Ethereum and its underlying smart contract protocol has often been described as a potential disputer to the multi-billion dollar online gambling scene, in its current form, the technology is not fit for purpose. Not only is the blockchain restricted to just 16 transactions per second, but a network overload subsequently results in ever-growing fees. This is nothing short of unviable for an online casino space that relies heavily on a high transaction throughput.
With that being said, it appears that Ethereum 2.0 could be here to save the day. The upgrade from proof-of-work to proof-of-stake will allow the blockchain to facilitate up to 4,000 transactions per second, as well as a more efficient and competitively priced ecosystem. This will be further amplified by the Ethereum Foundation’s decision to implement a more aggressive inflation policy, which will ease the burden on decentralized gaming protocols to cover transaction fees.