Bitcoin Betting: The crypto world has a funny relationship with risk

21 April, 2018

Professional money-movers would tell you that the crypto sphere is unregulated and volatile. This makes it a risky place to put investments. You might see your retirement funds triple over the course of a few weeks, only to have them crash-land at 50 percent of their initial value.

Crypto exchanges, moreover, are almost entirely unregulated. Pump-and-dumps and other schemes are widespread because the government has not yet found a way to reliably impose its will on blockchain-based technology.

At the same time, crypto promises fairness in a way that traditional trusted financial third parties simply can't offer. The key is transparency and distributed trust. Per the entity Satoshi Nakamoto's original vision forbitcoin, crypto blockchains use a distributed ledger to ensure that transactions made along that blockchain are verifiable by the blockchain at large.1

This prevents one single, monolithic entity - say, a bank or a casino - from manipulating the situation to its favor.

Thus, crypto was a natural for the world of online gambling, and it's bringing a degree of respectability to a once-shady subset of the betting world.

Provably Fair

Let's ignore the obvious - many online gambling sites now accept bitcoin for betting purposes.

That's simple adoption, and it only makes sense. Casinos are an entertainment venue entirely centered around transferring money from clients to the house, albeit in an uneven fashion. The client produces a stake - or a willingness to engage in risk - in the hopes that their odds of making money will temporarily exceed the house's. It only makes sense for the casino or other gambling venue, then, to make itself as accessible as possible. Like a lottery, the simplest form of gambling, the bigger the pool, the bigger the house's gain and the bigger the potential reward for participating gamblers.

The more crucial thing that crypto brings to the gambling world is the concept of provably fair games.

In the traditional gambling model, there has to be an inbuilt trust in the house to keep things aboveboard. This is enforced, in some cases, by government audits. A game in which the player has no odds at all of beating the house is hardly a game at all.2

Many online gambling sites lack traditional government oversight, and so the onus is on the player to do their own research and make sure that they haven't stumbled into a rigged online equivalent of a back-alley hustle. In most cases, this is nigh impossible to sort out before money is lost. Friendly backers of the online gambling venue can troll review sites, and there is no real recourse for addressing the problem until it's too late. After all, it's pretty hard to distinguish between an inherently unfair game and a run-of-the-mill stretch of bad luck.

The blockchain concept of provably fair, however, offers instant verification of a game's integrity.

Virtual Shuffle

Here's how it works. Let's use a card game as an example.

When the house shuffles its virtual deck, the deck is assigned a cryptographic hash. That hash can be checked by the player after the deck is dealt to ensure that the house didn't "pick" a favorable shuffle. Moreover, the player can cut the deck with their own cryptographic hash, adding a further level of shuffling. The result is a truly random - and provably fair - hand.

Provably Fair Play consultants audit certain online bitcoin betting portals to ensure the system is working as designed. It is not a government regulatory body; rather, it advises potential gamblers on which portals use a provably fair system.

Provably fair systems eliminate the worry about being cheated by a faceless online casino, the consultants say.

"This is a problem that a provably fair platform has finally been able to resolve," according to the consultants' website. "With an estimated conception date of early 2010, the method now known as provably fair has been designed to provide proof that the shuffles online casinos make are fair. With this particular proof of fair gaming being one of the most popular within bitcoin bitcoin casinos, nowadays, there is no longer a need to wonder if a casino is manipulating the outcome in any way."

Although card games present the simplest example, the provably fair system can be applied to any method of online gambling, Provably Fair Play adds.

"Another impressive feature that this new method possesses is the fact that it also works for non-card games. The same kind of approach is used. The main difference is that a different deck of cards is used by the provably fair gaming website," the consultants said. "If you are wondering what other games can be 'proven fair,' there are quite a number of them. Roulette, craps, and slots are just some of the games wherein players can prove that the casino did not do anything to manipulate them in order for the results to be in favor of the casino."

Making It Rain

Blockchain technology offers another, simpler benefit to online gambling - collecting your winnings.

A gambler is largely at the mercy of a non-provably fair casino from the moment a bet is placed. Assuming the game itself was fair, the gambler has to trust that the casino will honor the result of the game and make the funds available for withdrawal.

This used to be a serious point of failure for many online gambling portals. After all, there was no one to complain to if a shady online casino simply disappeared with your winnings or otherwise failed to honor the original bet.

The blockchain presents an open and transparent ledger of transactions. The same cryptographic hashing system that ensures your money doesn't disappear into the ether when you spend bitcoin bitcoin on a muffin also ensures that a casino can't simply glitch and "lose" your winnings. Your winnings are right there, built into the distributed ledger itself, and they are indisputable.

That's in addition to the relatively painless process of actually transferring bitcoin bitcoin and other alternative currencies. The middlemen have been almost entirely chopped out, so fees and transaction times are drastically reduced.

In the U.S., at least, winnings are taxable. Although it is always recommended to consult tax and legal professionals before making any decision concerning crypto taxes, confining your winnings to a blockchain system gives both players and casinos some leeway in how exactly they approach reporting their winnings. This has implications for casinos and players that cross national borders and have complicated tax reporting standards.

Risk Management

When a gambler steps up to the virtual card table, risk is a given. That risk, however, should come from the game itself, not the possibly shady characters behind the table. The concept of provably fair has the potential to revolutionize online gambling in a way that lends both accessibility and accountability to a formerly unregulated space. Best of all, that regulation comes from the casinos and players on the blockchain itself.

An old gambling adage roughly goes, "In any bet, there is always a fool and a thief."

Blockchain tech has escorted the thief from the casino and tossed them in the alley. Now, at least, all the fools can compete on an equal footing.

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1) Nakamoto, Satoshi. "Bitcoin: A Peer-to-Peer Electronic Cash System." Oct. 2008
https://bitcoin.org/bitcoin.pdf

2) "Gaming Audit Group." The Institute of Internal Auditors North America
https://na.theiia.org/membership/Pages/Gaming-Audit-Group.aspx