Gambling on the Blockchain By Andrew Tottenham, Managing Director, Tottenham & Co October 17, 2018 at 2:50 am Whilst at this year’s Global Gaming Expo I sat in on a talk entitled “Gambling on the Blockchain.” It was a fascinating look at how this emergent technology is being used in sectors of the gambling industry. I left the session scratching my head, though, and thinking that the inclusion of Blockchain technology was solving a problem that either did not exist or was not a very large one in the first place and probably didn’t warrant the effort. Let me first give a short explanation of blockchain technology. A blockchain is an encrypted distributed ledger that uses a novel approach to verify transactions and add them to the ledger. The most common use of the technology is in cryptocurrencies, although it can be used for anything where a verifiable ledger is needed. For the purposes of this explanation, I will use Bitcoin as my example, although there are many different flavours of cryptocurrency. The Bitcoin ledger is an encrypted list of transactions. When someone buys a bitcoin from another person, the amount is transferred from the seller’s wallet to the buyer’s wallet, but not before it has been verified and written to the blockchain. The wallet is a discrete piece of software that sits either on your PC, tablet or smartphone, or in the cloud. All of these have inherent security risks. The transaction is just an encrypted file with a big number that identifies the transaction, who was involved, the amount, the time, etc. This transaction is then bundled with a bunch of other transactions, called a transaction block, and published. This block is, again, a file containing a very large number. Miners – I will explain these in a minute – take this new bundle and the last bundle added to the blockchain and perform a very difficult mathematical calculation, basically a mathematical puzzle, the solution for which is designed to be hard to find but easy to check for accuracy – in other words, you can tell what the answer isn’t even if you don’t know what it is. The first miner that finds the solution to the computation publishes it on the network for other miners to see and verify. If enough miners agree, the transaction is then written to the ledger. As stated, the computation involves the new block and the last block written to the ledger. Hence the name Blockchain. In reality, all of these steps are automated. The calculations involved require a great deal of computing power, which is energy-intensive. Special hardware has been developed to speed the process up and reduce the amount of energy needed, but all of it costs money. To incentivise miners to spend their time and money on validation, the miner who solves the problem of that block is automatically awarded some Bitcoin. This, essentially, is why they’re called miners. A feature built into the Bitcoin code is that the amount of Bitcoin awarded for each block written to the chain is halved for every 210,000 blocks added, which at current rates is about every four years. This means that, at current rates, in around 120 years there will be a fixed amount of Bitcoin, with no more able to be added. (What might happen to incentivise the miners then is a whole other article.) What bitcoins, and cryptocurrencies like it, are really solving is the problem of trust. How do you know when someone pays you that they have the money, and that it belongs to them and will not be called back? This is a somewhat familiar problem in the online gambling world. With cryptocurrencies it is near impossible to wind back a transaction, and, because of the public key/private key encryption involved, it is difficult for someone to say that they did not authorise the transaction. However, if someone does get hold of your private key, you are in trouble – they can easily wipe out your account and it is impossible to get it back, as has happened on more than one occasion. Cryptocurrencies are also anonymous, which gives rise to regulatory headaches, especially where AML is concerned. This is why they are the darling of the dark web, and also why governments are racing to see how they can regulate and oversee the sector. Regulation and oversight of the exchanges where the cryptocurrency transactions take place is the likely method; those that use exchanges that refuse to be regulated will likely find it difficult to convert their cryptocurrency into fiat currency. The most basic use of cryptocurrency in online gambling is to guarantee payment. Crypto gives the player the confidence that, if they win, the operator will pay and vice versa. I maintain that player trust is not that much of a problem. Surveys suggest that a large number of players – the percentage differs with each survey – do not trust online gambling sites to be fair. However, despite this lack of trust, a large number of people do gamble quite happily. I think this is the same phenomenon we see when surveys show that people do not trust banks, politicians and the like – we may say we don’t trust them, but we still use them or vote for them. To overcome this lack of trust, some online gambling operators advertise that they are regulated in a Tier 1 jurisdiction, in effect transferring the trust issue to the regulator, but that does not stop people gambling on unregulated sites. Some gambling sites using cryptocurrencies use smart contracts, in effect blockchain algorithms that automatically transfer money given the right conditions. In a gambling environment, the player’s bet and an amount corresponding to what could be won is placed in a secure escrow. If the player wins the smart contract, which is just a piece of computer code, insures the bet, and the winnings are transferred to the player. The opposite happens if the player loses. This, in effect, transfers the trust issue to the smart contract. I don’t know about you, but I don’t spend a whole lot of time digging through the code that underlays smart contracts. Would I trust a company more because it said it used them? I might, but there would probably need to be an independent body verifying that the company was using them and that the code did what it said it did. Sounds like another regulator to me. Putting the potential winnings of every bet placed into an escrow account massively increases the amount of capital an operator will need access to. Imagine an online casino with 10,000 roulette players. Say each one bets £100 on a single number. The operator would have to escrow £35 million. Or if they all bet on a five-horse accumulator… I know this is an exaggerated example, but you take my point. Operators use risk management to determine capital requirements, understanding that not every player wins every bet. At the G2E talk, Jez San, the founder of Funfair Technologies, explained that his company went even further. Funfair uses both smart contracts but, by using a cryptocurrency called Ethereum, can run their game code off-chain or in “state 2”, which is a way of publicly verifying the actual code that is running. Again, though, does the gambling public really care that much about the veracity of the game code? And wouldn’t it still require an independent body to verify that? A further problem with using Ethereum and “state 2”is that, in the case of slot games, the game mathematics, something that game designers consider their secret sauce, would be open to public scrutiny. Beyond that, there are still issues with cryptocurrency fraud and with the volatility of the value of crypto against fiat currencies. That said, Winning Poker Networks recently announced that 60 percent of its transactions are now cryptocurrency. That, however, might have less to do with trust and more to do with anonymity.