An Intro to Blockchain: Crypto Casinos & Sportsbooks

Let’s sort through what’s going on here:

  • Bob wants to risk $25.00 on the proposition that the New York Jets win more than 1.5 Super Bowls over the next 10 seasons. He will deposit that $25.00 into a digital escrow account.
  • DraftKings, Bob’s counterparty, is offering this proposition at odds of +10000, meaning Bob would win $2,500.00 if the Jets miraculously win 2 or more Super Bowls between now and the 2030 season. DraftKings will deposit $2,500.00 into the digital escrow account so that Bob is certain the funds will be available in the event that he wins the bet.
  • A small bit of code is added that directs the account to transmit the funds to either Bob or DraftKings once the contract has expired, based on the number of Super Bowls won by the Jets over that period.

Fortunately, we don’t have to create this automatically-executing digital escrow transaction mechanism from scratch, because it already exists and is called a Smart Contract.

Smart Contracts

Of course, the “code” above is oversimplified and barely passes as pseudocode. Additionally, it makes no mention of the source of information to be used in order to verify the outcome of the underlying event. A massive event like the Super Bowl will generally be reported to have the same exact outcome regardless of what source we reference.

However, games played with less visibility may be harder to verify, particularly as the details sought become increasingly granular. Amidst the current global pandemic, many people have been betting on Belarusian hockey and Nicaraguan soccer, often relying on foreign sites with delayed scoreboards to track the progress of games and ensure bets are graded properly. Even many of the largest sports media outlets in the United States sometimes, at least temporarily, report incorrect scores. In fact, a Reddit user recently showed that he was able to manipulate the reporting of the first half score of an NCAA Basketball game simply by using Twitter to convey a falsified play-by-play and truncated box score.

When computers will be automatically executing instructions that impact the lives of human beings, it is essential that the logic built in for doing so does not give rise to unintended results or opportunities for exploitation. People in the world of blockchain use the phrase “code is law” to describe the fact that, once set in motion, an automated process will not yield to anything aside from its own programming.

There is a classic joke intended to convey this point:

A programmer is going to the grocery store and his wife tells him, “Buy a gallon of milk, and if there are eggs, buy a dozen.” So the programmer goes, buys everything, and drives back to his house. Upon arrival, his wife angrily asks him, “Why did you get 13 gallons of milk?” The programmer says, “There were eggs!”

This is relevant to our discussion because the use cases for blockchain within sports betting often rely upon a process by which event outcomes are verified and disputes are resolved.

One option being considered by those seeking to deploy Smart Contracts in the sports betting space is to use a fundamental blockchain concept and have a community of users vote in cases where outcomes are being challenged. For example, if you and I were both participants in a peer-to-peer betting exchange that utilized Smart Contracts and we disagreed as to the outcome of the event on which our wager is predicated, the other users of the exchange could be asked to vote and majority could rule.

There are a number of other nuanced complications that can arise from the search for a source of truth or “oracle” to use in the arbitration of disputes, but the loopholes offered by current implementations of the digital escrow structure are much more susceptible to exploit by unsophisticated actors with limited resources.

So, we’ve been talking for a while now about blockchain, yet haven’t even touched upon the topics of Bitcoin and cryptocurrency.

Cryptocurrency is just one of the many ways in which blockchains can be implemented, and Bitcoin is just one of the many cryptocurrencies that exist.

In other words, blockchain is the structure that underpins all cryptocurrencies, including Bitcoin. Specifically, it plays the role of the ledger that records all of the transactions (and therefore balances) across all currency-holders. One of the reasons for which Bitcoin and blockchain are thought of in such an inextricable way is that blockchain was invented by a mysterious person (or, perhaps, group of people) under the name Satoshi Nakamoto, specifically to serve as the public transaction ledger for the Bitcoin cryptocurrency.

If you are not interested in a deeper discussion about Bitcoin and the viability of cryptocurrency as means of transferring value, feel free to scroll down to the section titled, “Closing Thoughts.”

Terminology sometimes gets confusing, particularly because the Bitcoin cryptocurrency (BTC) is built on the Bitcoin blockchain, just as the Ethereum cryptocurrency (ETH) is built on the Ethereum blockchain. Ethereum was the first alternative to Bitcoin, and differentiated itself by supporting Smart Contracts and Decentralized Applications (DApps). There are approximately 3,000 other cryptocurrencies in circulation, though they do not all have their own dedicated blockchain. For example, FunFair is a decentralized gaming platform powered by Ethereum smart contracts, that has its own token (FUN). As of the time of writing, the total market capitalization of all cryptocurrencies in circulation was approximately $175bn.

The prefix “crypto-” is used because the process by which transactions within the network of a particular currency are recorded and validated, and thereby permanently stamped onto the distributed immutable ledger, involves mathematical computations that borrow from the field of code breaking or cryptography.

Characteristics of Money

An interesting debate has persisted as to whether cryptocurrencies are truly substitutes for money. Aristotle had famously outlined four key characteristics, all of which needed to be fulfilled in order for a means of value to serve as “money.”

  1. Durable — It must be able to stand the test of time.
  2. Portable — It must be easily moveable and hold a large amount of value relative to its size/weight.
  3. Divisible — It should be easy to break into smaller pieces (and reassemble) without ruining its basic characteristics.
  4. Intrinsically Valuable — It should be valuable in and of itself, with value completely independent of any other object.

However, these criteria were outlined over 2,000 years ago. The world is very different today and in ways that specifically change the requirements a society places on a monetary system.

The increase in mobility offered by modern technology has necessitated inventions like, for example, checking accounts and checkbooks. Writing checks allows bank customers to transfer enormous amounts of value directly from their account into that of a merchant or vendor, typically in exchange for goods or services, without worrying too much about theft and security. Since a check only has an intrinsic value equal to the cost of the paper it is printed on, losing one is relatively inconsequential. A quick call to the bank and that check will be cancelled, leading to a loss of essentially nothing. However, with just a pen, one can transfer millions of dollars elsewhere using that same check.

When you think about it, even cash, often considered the most pure form of “money” does not have much intrinsic value. In fact, a $100 bill is only worth more than a $1 bill because each person who possesses it believes that the next person will value it just as they do. Additionally, most currencies are backed by the “full faith and credit” of their issuing government, which helps reinforce the faith people place in the ability to use that currency for transferring value.

The group of currencies whose value as legal tender is rooted not in intrinsic value but in the full faith and credit of a government are known as “fiat currencies.

According to the St. Louis Fed, there are actually six characteristics which must be fulfilled in order for a system to be considered “money” today. We notice quickly that the first three are the same as those posed by Aristotle, with the other three replacing his requirement of intrinsic value.

  1. Durable — It must be able to stand the test of time.
  2. Portable — It must be easily moveable and hold a large amount of value relative to its size/weight.
  3. Divisible — It should be easy to break into smaller pieces (and reassemble) without ruining its basic characteristics.
  4. Uniform — Units of the same denomination should be generally identical in nature and, therefore, fungible.
  5. Scarce — Units must have a limited supply in order to maintain value.
  6. Acceptable — Units must be universally accepted as vehicles for transferring value.

It seems that a very convincing case for Bitcoin as money can be made. On May 22, 2010, Laszlo Hanyecz succeeded in paying 10,000 Bitcoins for two delivered Papa John’s pizzas. This day has since become known as Bitcoin Pizza Day. At current prices, those two pizzas would currently be worth $63.1mm. When Bitcoin’s price was at its highest, on December 17, 2017, they would have been worth $197.8mm.

We can quickly run Bitcoin through all six of the St. Louis Fed’s tests:

  1. Durable — Bitcoins are virtual representations of value that cannot be destroyed, though access to them can be lost.
  2. Portable — Bitcoin weighs essentially nothing and allows for a virtually unlimited amount of value to be carried on something as small as a piece of paper.
  3. Divisible — While a Dollar, Euro, or Pound can be split into 100 units, a Bitcoin, by design, can be split into one hundred million (100,000,000) units.
  4. Uniform —Bitcoin is perfectly uniform, though there is debate as to its fungibility.
  5. Scarce — Bitcoin uses mathematics to cap the total possible supply at 21,000,000 (there are currently ~18mm BTC in circulation)
  6. Acceptable — The rise of exchanges, user-friendly mobile applications, Bitcoin ATMs, and other technological phenomena along with sociopolitical considerations has caused Bitcoin to rise to one of the most accepted currencies in the world.

Going through a similar exercise with dollars or gold may reveal some insights into where you stand on the debate of cryptocurrencies serving as a real replacement for money.

Crytpocurrencies have often been drawn synonymous or parallel to illicit activity and dark web dealings. However, there is nothing inherently illegal or evil about the underlying technical infrastructure. In fact, some governments and central banks have begun discussing the possibility of operating blockchains and cryptocurrencies within their daily operations.

The chart below shows how a Central Bank Cryptocurrency would amount to a decentralized virtual representation of value purveyed by a monopolistic entity, as well as how that compares to other forms of value exchange.

Cryptocurrency Realities

Cryptocurrencies can offer, among other things, anonymity, which can be good or bad, or sometimes both. That said, the safety of the digital wallets in which crypto fortunes are stored are only as safe and reliable as those who hold the key needed to access them.

Without getting unnecessarily technical, the most important aspect of maintaining the security of a Bitcoin wallet typically concerns how we protect our password. The account itself is generally regarded as impenetrable, unless someone obtains our “private key.” Because of this, people go to incredible lengths to store passwords in secure ways. Not only this, but they often use very long passwords with the largest variety of characters possible. Some have reportedly gone as far as to write the password down on a piece of paper, cut it into multiple smaller pieces, and placed each piece into a safety deposit box in a different bank in a different state.

Still, it is estimated that 20% of the Bitcoin value that is ever created will be lost permanently due to misplaced passwords or private keys. As of the time of writing, that would be over $20,000,000,000 ($20 billion) worth of Bitcoin. The reason for this is directly related to the underlying security of a Bitcoin wallet — without the password, it is virtually impossible to access.

People often use the phrase “cold storage” to describe the process of saving private keys on devices that are never connected to the internet in order to provide maximum protection from malicious actors.

This facet of the ecosystem has given rise to a number of interesting stories in which the owners of crypto funds or exchanges go mysteriously missing, along with all of the assets under management, never to be seen or heard from again.

We started out this discussion by noting that a blockchain casino or sportsbook is not one that merely accepts cryptocurrency deposits. Rather, it is one that is actually built onto a blockchain. Now that we’ve gone through an introduction to key concepts, we can understand what applications are within reach of the market and what limitations might exist. Specifically, we can examine this first as relates to provable fairness and then as pertains to Smart Contracts.

Provable Fairness

Online casinos are perfectly suited to employ a blockchain that helps assure customers that games are not rigged. In fact, some already do.

Traditional sports betting does not clearly benefit from the concept of provable fairness. However, DFS contests and sweepstakes functionalities within operator ecosystems potentially could.

Smart Contracts

From a value-add standpoint, the use of smart contracts in online casinos is quite appealing to users. However, the operations can be prohibitively capital intensive. We can take the example of a roulette spin to illustrate this.

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