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5 Reasons Why Online Gambling Needs Blockchain

Abstract : The transparency of blockchain and smart contract code allows players themselves to audit the games they play. In contrast to traditional black box online casinos, blockchain based games can make game mechanics and house edges completely transparent and public. Here are 5 reasons why blockchain will revolutionise the online gambling industry.

Betting on Blockchain by BetProtocol
Betting on Blockchain by BetProtocol Institutional

Apr 12 Providing thought leadership on how blockchain disrupt the online gaming industry and bringing more transparency and fairness to the market

Reason #1: Fairer Odds

Did you know that the minimum Return to Player Rate (RTP) in New Jersey is 83%, while in Nevada it is only 75%? The Return or Player rate (RTP) is the overall percentage of money played into a particular game that is returned to the player, statistically overtime (Note: it is not the chances of winning at any given, individual game). That means statistically every one-hundred dollars put into a Nevada slot machine only returns $75 dollars to players. The remaining $25 goes to the house. That's why its nick-name is "The One-Armed Bandit"!

You may be thinking that the RTP is simply the inverse of "house edge", and you're right. In contrast to most legacy operators, blockchain based gambling sites have smart contract programmed edges that are almost always 3% or less. That means the RTP of these games is 97 - 99%.

But how can blockchain based games offer such a high RTP? It's because they have lower costs. Instead of having all the overhead of staffing and running a physical casino, all you have is a set of smart contracts and the blockchain itself. The miners or validators on the blockchain network handle the security, execution, and uptime for the blockchain based casino. The only costs are transaction fees, and cost of initial game development. This brings us to our next reason.

Reason #2: Cost Savings

Française des Jeux, France's state lottery, pays a whopping 87% of their revenue on backend costs. Most of these costs are associated with running administrative tasks, staffing a large number of people, fixing bugs, compliance, and of course physical points of sale for the lottery tickets. In their latest annual earnings report, they report costs over a billion euros in operations.

Costs associated with running a smart contract based lottery are not even comparable. Each transaction may cost anywhere between $0.03 to $0.30 in cost to miners to mint a cryptographic lottery ticket. Even if you add expensive and necessary external 3rd party smart contract auditing services for security, the costs are nowhere comparable with land based lotteries.

For entrepreneurs looking to startup their own betting company, the cost savings are also very significant.

It costs anywhere up to $500,000 USD, 6 months, and additional thousands of dollars in lawyers fees to startup a regulated betting application in the legacy space. In terms of backend, you need to either build your own servers, systems, and handle your own security (very expensive) or go through a provider like SBTech or Kambi. Both of those firms regularly charge up to a half-million dollars for their services, plus other yearly recurring fees.

Gambling licenses are also very expensive, costing anywhere from up $50,000 to over $1,000,000 in paid up share capital depending on your jurisdiction.

What if there were a service that leveraged blockchain to deliver the same utility and compliance for a fraction of the cost? A company called BetProtocol could be the solution.

For enterprise firms in the online gaming industry, betting on blockchain is also a good idea. The costs for deposits and withdrawals for cryptocurrency are far lower than industry standards Visa/Mastercard, Neteller and Skrill. All these services charge up to 3.5% of the value of the transaction in fees, while cryptocurrency deposits cost cents.

Reason #3: Transparent Random Number Generators

Online Casinos are required to be certified by 3rd party independent auditors to ensure that their games have fair odds. For table games, card games, slots, keno, roulette, and many other games, a Random Number Generator (RNG) is employed. The RNG works by algorithmically generating numbers in a pseudo-random fashion. A certain starting number, or "seed number" is used. This seed number is then fed into an algorithm to produce an output number, and it is this output number that is used to generate the result of a game. The RNG constantly does this, whether or not a player is playing. This is why the myth of a "hot machine" is a fallacy. There is simply no such thing, since the RNG is always calculating.

RNGs are said to be "pseudo-random" because the process of generating new numbers is entirely deterministic. If one knows a seed number and the algorithm itself, one can then easily determine the output numbers, and thus the outcome of any game. 3rd party auditing labs use this process to certify RNGs to make sure the games are fair. The player must simply trust the 3rd party auditor and the casino that the random number generator behind the games they play has not been rigged to cheat them. Players are never allowed to audit the code behind the game, nor how it interacts with the RNG. The auditing 3rd party will at most issue a certificate saying that the RNG is fair, but will not otherwise prove to the public by providing the evidence itself.

Astute readers will realise that there are several security flaws in this system:

Exploit #1, The Switch:

The casino could change the game mechanics and/or RNG right after passing an audit to increase its edge, only to change it back again right before the next audit.

Exploit #2, The Collusion:

The 3rd party auditor and the casino could collude in secret to rig the game against the players, while publicly certifying that the game is fair.

Exploit #3, The Rig:

No matter what the RNG says, the operator rigs the game logic to always make the player lose given a certain bet size, or win/loss ratio, or any other criteria.

Note that we are not accusing anyone of any wrong doing, we are simply pointing out some exploits that exist. These exploits can be mitigated or eliminated by the use of blockchain and smart contracts, which force both the player and the operator to commit to a number cryptographically before the game is played. That way, it is provable that neither the player nor the operator tampered with the numbers or rules during the game.

Reason #4: Compliance is less of a nightmare

Online gaming operators are regularly fined hundreds of thousands or even millions of dollars annually for reporting mistakes and compliance issues. Regulators in most jurisdictions require monthly or quarterly reports from all the operators in their country. These reports have data on all players, deposits, gaming history, win/loss, withdrawals, time played, and other statistics. All of this data has to be correct and match the information the regulator has collected from the operator's bank account, previous reports, and inspections. When the data is not accurate, and when there are discrepancies between the operator's report and the regulator's inspections, the result are fines.

Heavy fines.

Blockchain based betting resolves these issues by committing all the data to the same blockchain. Both the regulator and the operator see the same data on the same blockchain, and also scrape the same data to make their reports or inspections, so in theory there should never be any discrepancies. Nor any fines.

Operators also have the responsibility to stop problem gambling such as underage gambling, gambling by people who have self-excluded, or gambling from geographic locations where it is not permitted in the given jurisdiction.

By linking KYC information to player blockchain addresses, both operators and regulators can have stronger control over who is able to game and who is not. Operators can easily set up an intermediate smart contract wallet that queries a list of restricted addresses linked to players who have self-excluded, or players that are identified as from a non-permitted jurisdiction. You may be thinking, "what if the player uses a new address to send the funds?" Intermediate wallets can be programmed to reverse any incoming deposits from wallets not on an operator's whitelist of people previously passing due diligence checks. 

This way, compliance efforts are able to be automated and performed quickly and cheaply.

Reason #5: Traditional Online Gamblers are getting older

Over 80% of the online gaming industry's revenue comes from the Baby Boomer generation. It is clear that this demographic is ageing, and the online gaming industry will face a huge crisis in its player base in 5 - 15 years.

Millennials on the other hand have now become the most important and largest demographic in the world in terms of spending power and brand loyalty. Research has shown that millennials are more than 3 times as likely to purchase cryptocurrency than stocks.

Millions of millennials worldwide are now cryptocurrency users and gamers. The online gaming industry as a whole needs to find a way to reach these millennials if it hopes to survive the next twenty years. The way they reach this audience is through blockchain based games and cryptocurrency online casinos.

The Betting Industry Needs Blockchain

The benefits of lower costs, more transparency, and easier compliance efforts by leveraging blockchain are clear value adds for the online gambling industry. As legacy gaming markets stagnate, it becomes more and more urgent for new players and new operators to enter the industry. Blockchain is the perfect vehicle for lowering the barrier to entry for developers, which will lead to more games and more choice for consumers.

(Author: Betting on Blockchain by BetProtocol, the contents of this article comes from ChainDD Open Content Platform DD Blog. The views expressed in this article are solely the author's. They do not represent the official position of ChainDD.)

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