Market Incentives in Dicing
As you read this post, there are people gambling. Right now there’s a thousand people that are sitting at slot machines, gambling against a house that has an edge of around 3–5% for every roll. There’s a million people that play various lotteries or purchase scratch-off tickets, which have house edges so high that they might as well be throwing their money away. Then there’s many others that play against a slightly more reasonably house edge, such as 1–2%. Card games at a casino are a good example of this, as long as the player plays decently. These players are doing better than the slot machine players and the lottery players, but only by so much. It’s important to stress that a house edge is applied to every single bet. If I make 100 bets with an edge of 1%, I’m expected to lose 100% of that bet value by the time I’m done. And that’s if I’m not unlucky.
Then comes online dicing. Dicing sites have offered house edges as low as 1–2%. Cryptocurrency gambling has in many ways enabled those wishing to gamble to do so in a much easier and fairer way, utilizing the amazing technology of the blockchain to process withdrawals and deposits with ease. Dicing sites have improved over time, offering features such as provable fairness, lower house edges, and allowing users to bet on the house by investing in its bankroll.
But even after all of these improvements, there’s a lot of downsides to using one of these websites. For now I’d like to focus on the house edge. We know for a fact there’s a large amount of people that are willing to gamble against a 1% house edge. Thousands of people do this every day. But there’s a superior alternative, which is to just let people gamble against each other instead. Instead of having two players both lose 1% of their money to a house every bet, they can bet against each other.
There’s a bit more work involved in this process because the players need to find a fair way to bet and need to agree on the terms of the bet. But this changes a player’s actions from having a negative expected value (of losing 1% per bet) to having a neutral expected value. Even if a fee was charged of 0.5% per bet, it would be superior to dicing websites already.
Although provable fairness exists on many dicing sites now, there are still problems with it. One example is that players will often not verify their bet or not change their seed that is used in generating the roll. But even if we assume that the provable fairness of a bet is perfect, the player still needs to make a deposit and withdrawal to the dicing website. The dicing website could be compromised, or have an empty hot wallet, or the owner could just refuse to give someone their winnings (or initial deposit).
Ethbet solves all of these problems in a superior manner to traditional dicing websites. Provable fairness is improved by having a decentralized smart contract process the bet. The smart contract is transparent and open-source, unlike the software of traditional dicing websites. Deposits and withdrawals are solved by having the smart contract perform them, so that a player’s money cannot become stuck in a website or held by a malicious actor. The final problem of a high house edge is solved by matching players up against each other.
Ethbet’s role is to mediate bets. One simple analogy is that Ethbet is like an exchange, except instead of users agreeing to trade an asset at a certain price, they are agreeing to gamble a certain asset with certain rules. Just like dicing websites have improved over time, so have exchanges. Ethbet is more analogous to the decentralized exchange protocol known as 0x: users broadcast their desires to a relay, and when a match can be found, the users both use a smart contract to fairly execute their intention.
Exchanges make a profit by taking a small fee out of every transaction, just like what a house edge does for bets. Some exchange fees are very high (such as Coinbase, with fees between 1–5%), while others are more modest, and commonly range between 0.1% and 0.5%. Regardless of how small this fee is, exchanges make a lot of profit. What is nice about the exchange’s profit model is that there is no risk on its side. An asset can crash or appreciate 10 times in value, and the exchange profits equally from both of these events by taking fees out of every trade executed.
In order for an exchange to function, it must provide liquidity. Exchanges commonly help incentivize market participants to provide liquidity by charging lower fees for those that offer trades, and charging higher fees for those that take trades.
This is the essence of how Ethbet’s variable house edge functions, and why it was implemented. Instead of participants providing liquidity for an asset, they provide bet liquidity, which makes the platform easier to use for others as there will be more bets available. As a reward for providing this liquidity, they get to set the terms of the bet. Someone that takes bets is removing bet liquidity from the environment, and as a deterrent to this they only get to make a bet on someone else’s terms. The result is that market participants decide what bets are available, and at what house edge.
You could imagine a player that is very wealthy. They offer many bets with a 0.5% edge in their favor. They are effectively their own casino, but they need not host their own website or write their own software. They can just offer bets on Ethbet just like traders offer trades on exchanges.
Ethbet will be able to become a popular peer-to-peer platform for this reason. It will be able to offer bets with lower fees than alternatives due to the market incentives of the system that it creates. Aside from players wishing to maximize their expected return, there’s an appeal to betting against another human instead of against a house. As Ethbet matures as a platform, it can offer other forms of betting, however due to the novelty of a peer-to-peer betting platform based on Ethereum, dicing is the first game that will be fully completed.