Ethereum Is a Planetary Scale Computer—For Gambling

When Ethereum was launched in July 2015, the Ethereum blog put out a finely crafted video describing a “planetary scale computer” that would be free of censorship and third party interference. Cutting to a scene of an interconnected power plant, grocery cart, and airplane, the narrator smoothly declared that Ethereum would “be the secure backbone for everything from e-commerce to the internet of things.”

How far has Ethereum progressed in attaining its lofty goals? Scan through the list of popular decentralized applications, or dapps, that have been built on Ethereum and you won’t see any grocery or airline apps. No, Ethereum has become a den of gamblers. Some of the most popular dapps are casino games, ponzis, and high-yield investment programs.

For those who envisioned that Ethereum’s destiny was to become the “backbone for everything,” this must be a disappointment. But I’d argue that gambling is exactly what you’d expect from a system that claims to be censorship-proof.

At the time of writing, the most popular dapp by number of users was 333ETH, a high-yield investment program that promises “life-long payments” of 3.3 percent per day. This can’t be true. If it were, a $1 investment would be worth $36,000 after one year. Other popular apps include vDice, Zethr, and Etheroll. Players send ether tokens to these smart contracts, which simulate the roll of a dice or spin of the slots.

Ethereum is a perfect tool for evading all of the above gambling rules and regulations.

But the most controversial gambling app to hit Ethereum has been Proof of Weak Hands 3D, or PoWH3D. Debuting in February 2018, about 35,300 ether (ETH) has been committed to the PoWH3D smart contract, or $7.6 million, the second most of any dapp. This is down from its peak on July 28 when the pot was at 85,000 ETH, or $40 million.

All games of chance require a way of splitting up the pot. In PoWH3D’s case, early entrants are rewarded at the expense of late entrants. Players send ether—Ethereum’s inbuilt currency—to the PoWH3D smart contract, getting tokens in return. For every purchase, the algorithm ratchets the token price up and for every sale it decreases it. New entrant must pay a 10 percent “tax” to all existing players. Given this setup, the earliest birds are positioned to win big. Not only do they earn 10 percent of each of subsequent entrants’ contribution, but they also have the chance to sell their tokens at a higher price.

Each of Ethereum’s gambling developers has made a business decision to avoid centralized servers in favor of a decentralized option. Perhaps this isn’t so surprising given the hurdles involved in setting up a regular gambling site. Imagine a group of entrepreneurs based in San Francisco who want to bring a version of PoWH3D to the masses. They set the game up on a California-based server. But the site is immediately shut down. A stern state gaming official tells them that online gambling is prohibited everywhere in the U.S. except for New Jersey, Delaware, Pennsylvania, and Nevada.

So they shrug and move to New Jersey to set up their website. Once again, they are shut down. In 2013 New Jersey legalized online gambling, but there’s a catch. To protect incumbent physical casinos, an online casino site can’t start up from scratch. It must partner with an existing land-based casino located in Atlantic City.

Assuming that our gambling entrepreneurs succeed in convincing an existing casino to partner with them, they still have to pay the New Jersey gambling regulator a $100,000 application fee. If approved, the license will cost $400,000. Then they will then have to pay an annual $250,000 renewal fee. That’s not all. New Jersey will take 15 percent out of the site’s gross gambling revenue as tax and another 2.5 percent for the Casino Reinvestment Development Authority.

Even if our entrepreneurs get this far, they can expect to encounter another hurdle. The New Jersey regulator will rubber- stamp traditional games like poker and black jack, but will balk at a novel betting game like PoWH3d. Even if they do approve it, the pool of players who can join is limited. The regulator requires the use of geolocation software to ensure that all players are within state lines.

Given all these hurdles, our would-be entrepreneurs can’t be blamed for choosing an offshore jurisdiction like, say, Gibraltar. The problem here is that thanks to the Unlawful Internet Gambling Enforcement Act of 2006, Visa and MasterCard won’t process U.S. payments to offshore casinos.

It is this accumulation of woes that finally brings our disheartened entrepreneurs to Ethereum. No one can prevent them from programming a novel gambling smart contract. And once the contract is up and running, angry authorities cannot pressure the nodes to shut it down. Nor can regulators blockade the dapp by pressuring payment processors—a valuable token, Ether, has been built directly into the network.

So Ethereum is a perfect tool for evading all of the above gambling rules and regulations.

Ethereum is doing exactly what it one would expect it to do. It is providing a medium for escape from society's rules and conventions.

Does this make society better off? In some ways, yes. For instance, the rule requiring our entrepreneurs to partner with existing Atlantic City casinos is an example of rent-seeking. The incumbents have managed to game the political system to extract benefits they do not deserve. This hurts consumers too, since they will have fewer venues to choose from. By providing a neutral landscape, Ethereum tilts the balance of power away from rent- seekers and back towards innovators and consumers.

Unlike the state regulator, Ethereum doesn’t impose licensing or renewal fees. So Ethereum gambling smart contracts can afford to keep their “’rakes” very low. The rake is the amount of each pot that the game organizers keep for themselves. Etheroll, one of the dapps, charges customers a commission of 1 percent. Compare this to New Jersey’s online casinos, which rake around 5 percent from each game.

Choice and low prices are great, but society is also damaged by Ethereum-abetted evasion. In small quantities, gambling is a harmless amusement, like going to see a movie. But when people become addicted to gambling, very real costs are imposed on others. Chronic gamblers may go into debt, putting their family’s savings into jeopardy. They may resort to theft in order to fund their habit.

To help combat problem gambling, New Jersey requires each online casino to pay an annual fee of $250,000. This is divvied up among compulsive gambling researchers and New Jersey’s gambling rehabilitation fund. Casinos are further obligated to provide vulnerable players the opportunity to self-exclude or set cooling-off periods. To prevent underage players, sites must collect a name, address, and Social Security number.

Ethereum subverts these goals. Dapps cannot be pressured into implementing the same costly responsible gambling practices that regulators have imposed on licensed casinos. Underage gambling? Sure, why not. In addition to dodging regulations, Ethereum allows casinos to avoid high gambling taxes. Taxes on noxious activities raise that good’s price, thus encouraging people to find substitutes. By providing a work-around, Ethereum undoes much of society’s effort to reduce gambling.

So in the end, what can we say about the proliferation of Ethereum gambling apps? Ethereum is doing exactly what one would expect it to do. It is providing a medium for escape from society’s rules and conventions. Customers benefit from this rule-breaking because the lack of regulatory burden gets passed off to them in the form of a low rake and increased choice. But there is a negative side to this. Voters have approved many of these rules because they have laudable social purposes. A high tax on gambling reduces demand, and responsible gaming rules help problem gamblers. Ethereum circumvents the democratic will.

Gambling isn’t the only activity that will find a home on Ethereum. Any highly-regulated industry where rule-breaking can lower prices is also a candidate. But if good people who want to break bad rules can set up on Ethereum without fearing reprisal, so can bad people who want to break good rules. It is this tension that makes Ethereum such an ambiguous concept.