Blockdraw is born

Knowing what you don’t know is half the battle

Like all entrepreneurs, I have stories. Really these were a series of small journeys. But the most recent adventure, which is Blockdraw, really has its roots back in 2008, in the heat of the financial crisis. My securities company, Castor Pollux Securities was facing serious challenges; we had no debt, or customer funds, but we were losing clients and income went to nearly zero in a matter of months. But in the midst of chaos, there is always opportunity. For me, it was named Bernie Madoff. Despite running a fraud, Madoff had been simultaneously operating legitimately in the securities business for decades as an equity market maker. I entered his world shortly after the government seized his assets in 2009, after the fraud was uncovered. I knew that Bernie had developed a passive automated market making platform that was the 5th largest in the United Stated. At one time Citibank reportedly offered Madoff $200M for the business. I had started my career as a pit trader on the Chicago Mercantile Exchange back in the 1990s. And, as fate had it, I had attended a boarding school in the early 1980s where I learned to program, a skill I honed while working in Chicago developing options pricing software. So, I confidently believed I knew everything one needed to know to take over this business. I had enough technical background and trading experience that I figured I could lead the team to restore this operation to its former glory. Miraculously, despite the pandemonium and fear of the financial crisis we raised the initial $15M and Surge Trading was born.

Now the story of “Buying Madoff” is a long one and not the point of this article. What was important was that we, now called Surge Trading Inc, took over the code but the lead programmer who developed the system was gone. We had to re-learn the code from scratch. With a lot of grit, we got it running in 3 months and added several risk control enhancements that were industry firsts. And yet, despite our best efforts, the system wasn’t generating profits daily as it had for Madoff. Lots of speculation arose, but shortly after that I got into a tiff with the venture fund and never got the chance to solve the problem and see the work of a lifetime flourish. Under new leadership, it ultimately failed, but years later I would learn what we were doing wrong in the strangest place.

Enter the Alderney Gambling Control Commission where in 2012, I became the Deputy Director of Licensing. I essentially became an online gaming analyst. Every new applicant went by my desk. Not only did I get the most confidential information, but I was charged with doing full probity checks on both the online operators and their businesses. I later also ran investigations for the AGCC as well. In my position I had unprecedented access and was able to dig deep into ever major online licensed casino, poker, bingo, lottery, game designer and sports book operator. In nearly four years I reviewed scores of businesses and was often able to compare and contrast different companies with similar strategies in order to see what did work, and what didn’t work.

But my most interesting story was an investigation of an Eastern European operator. This sports book operator was losing money on the top line numbers (gross payouts to gamblers were nearly greater than gross wagers), a commercially impossible feat. But using the same prices his Eastern European business was massively profitable. There was concern that perhaps there were AML issues that needed to be investigated. So I was sent in to do an audit. After a day, it became clear to me that the operation we licensed was clean, but the facts still seemed impossible. So I sat down with the local operator’s CEO, and I asked him how this could be? He explained that the odds in the sports book were generated from Eastern European players who provided massive order flow to them, and these players were net losers. But in the AGCC operation, they were only attracting professional betters who were picking off their best odds and avoiding the bad odds — hence they were losing money on the bulk of their players under our license.

And that was when it hit me! In our trading operation at Surge Trading, we were only able to attract institutional order flow into our system. Madoff never paid for retail order flow. His reputation, before his fall, allowed him to attract the biggest names, but these customers wanted us to pay for their order flow. Since we were breaking even, we feared that paying would take us deeper into the red.

But we were wrong.

Just like the Eastern European operator above, we were being cherry-picked by institutional traders, and yet we still managed to break even! There was nothing wrong with the system; it was the type of order flow — retail order flow had much higher margins than the professional order flow! If only I had understood that at the time!

And this is the punch line. You need to know what you don’t know! Its the smallest details and perhaps least obvious that can mean the difference between success and failure.

The problem with most Blockchain developers is they approach the process as developers and not as businessmen who understand the industry.

And this is going to be their undoing!

The bulk of Initial Coin Offerings are run by technology geeks who have no real understanding of how to build or operate a business. Moreover, the traditional infrastructure that a venture or private equity fund would provide isn’t around, since its so easy to raise the money. This simply isn’t the case with Blockdraw, not only do I have decades of experience running professional businesses, but my time at the AGCC showed me everything I needed to know about how to run a proper gambling business. Our COO, Konstantinos Despotakis, is a former online Gambling CEO and also a former Deputy Director of Compliance at the AGCC. At Surge Trading I hired Kim Lumbard, Blockdraw’s current CTO, so we have known each other for over a decade. Kim, who taught Information Theory at Caltech, was integral in helping us solve the important problems we wanted to crack. We simply do not know of any other Blockchain online gambling business with the management, regulatory and technical knowledge and experience that we have in place.

Why are we building Blockdraw?

Because as an ex-online gambling regulator I understand that the current regulatory system is not effective at protecting players from various types of fraud committed by operators, such as what happened at Full Tilt Poker. I learned that regulation is at best a band-aid. The entire online gambling industry is based on the idea that the player must trust a third party or the regulator of that third party; such a system is ripe for disruption. and we are determined to crack it wide-open. Our team also understood that all the current blockchain implementations were not tackling the problems and their solutions in fashions that would work within the existing business frameworks.

One of our biggest edges over our competition is that we know what we don’t know.

When I founded Blockdraw, I did so knowing a lot about the underlying technology and having intimate knowledge of the industry, not to mention 10s of thousands of hours as an entrepreneur. In the online gambling space, a lot is happening, but nearly every single operator is approaching the process as a developer, trying to build the coolest technology. We came at Blockdraw from a very different angle.

What do all the stakeholders need and how can everyone benefit from the technology?

We wanted to merge the best of all available technologies and still get trustlessness, verifiability, IP protection and security. Everything a real business needs to be successful when disrupting an existing industry.

Blockchain casinos have the opportunity to transform the online gambling industry.

But why isn’t it happening? Because the current implementations are not going to be acceptable to both mainstream regulators and serious operators with reputations to protect. What online public gambling company will accept an open source state channel with all the game logic and IP exposed? And if you want mass acceptance, you need the marketing muscle of a profitable gambling business. No board would accept that, and many regulators would be concerned about the security risks. Even today only a few regulators will accept cloud computing due to the perceived risks! The idea that you are going to release a native app into the wild with no regulation and no protection of underage or vulnerable players is nonsense. Governments (and even society in the context of gambling) will not stand for it — but this doesn’t mean there isn’t a win-win solution.

At Blockdraw we decided to look at all our competitors along with the available technological options, and look for a better way:

1. Most systems rely on casino operators to be a trusted third party. That means player funds are held hostage and are vulnerable to compromise.
2. Blockchain technologies are still maturing. While they offer great public verifiability, they are too slow, too insecure, and too expensive.
3. Most companies use advanced state channels on blockchains. These are high performance with robust distributed accounting, but suffer from inherent security flaws and have no built‐in legal / compliance features. They will struggle to get acceptance among regulators and mainstream operators.
4. The legal status is also still maturing. This affects not only regulation, but also the legal capacities and recourses of all parties involved.

Once we understood the problems, we sought the solutions:

1. We used a combination of the best technologies to create a process that would work for all parties
2. We harnessed a sophisticated non-shuffling cryptographic-based mental poker algorithm for truly trustless, peer‐to‐peer decentralized gameplay. That means everyone has to play by the rules, including us! All funds are owned by players and managed on the public Ethereum chain
3. We created the L.E.A.P. System to run the most advanced distributed casino platform in the world. It’s faster, more secure, and cheaper to operate. It runs off multiple servers, giving high redundancy and low latency. But that’s not all that our patent‐pending technology offers: a) the L.E.A.P. process is designed from the ground up to be provably fair, verifiable, trustless, and cater to the needs of the mainstream online gambling industry; b) We are devising innovative “black box” verification systems to satisfy even the most skeptical users and regulators.
4. L.E.A.P. also has legal capabilities designed into it. It preserves provenance, can act as a custodian of evidence, and is compliant not only with today’s regulations, but can enable more sophisticated law for the future.

Blockdraw is going to be controversial

Alot of people in the blockchain community will criticize our technology. They will tell us that you have to be open source, that this is the only way you can get verifiability and trustless operations.

They are wrong.

Groundbreaking ideas are always controversial. Christopher Columbus battled his crew. We will take our message to the community with the same zeal. Open source has many advantages, but its biggest strengths are in community development. At the same time, 95% of the business blockchain ideas are internal development projects that can’t use this open source advantage. The other so-called advantage of transparency is also its greatest weakness, leaving a business open to hacks and security vulnerabilities. So what remains is verifiability. It turns out that you don’t need to reveal the code at all to provide absolute verifiability. Using automata theory and providing some information on our algorithms mechanics we can provide definitive block box verification so that not only we can’t change, view or alter a game, but the moment anything untoward happens everyone will know it! That’s far more useful to a user than code many won’t even understand. Our systems were designed to satisfy the needs of all parties and bring the Blockchain to online gambling.

Any developer knows that when you have a maturing product with multiple people touching the code, mistakes or poor coding are not only likely, they are inevitable. In gambling or finance structures this is unacceptable. This makes current state channel solutions extremely insecure. Instead, we use private blockchains that are linked to the public blockchain by notary stamps. This design means that our smart contracts are more secure, but have the same verifiability and trustless operation as open source state channels, with the added advantage of business-class security.

Welcome to Blockdraw — we are going to disrupt and transform the online Casino industry forever!

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