The Race to The Lowest House Edge

Colin McCrae
Jul 27, 2017 · 5 min read

By Colin McCrae

Gambling has quickly found itself as one of the most popular uses for smart contracts on the blockchain. Simple contracts can be created which pay out winnings based on provably fair rules. The open source code means that these rules are visible for all to see, and so users can be assured they are playing a fair game. Once deployed, the contracts are immutable, fully decentralized, and cannot be shut down.

One of the earliest examples of blockchain gambling was SatoshiDICE on the Bitcoin network. First launched in 2012, SatoshiDICE allowed anyone to send transactions to their address, and the user would either receive winnings or a tiny pay-out to signify a loss. Since then, many more competitors have established themselves, many of these instead using the Ethereum network.

Ethereum is an especially appealing platform for blockchain gambling. It has been designed from the ground up to be a global decentralized computer that anyone can use, and which can transfer value in the same way as the Bitcoin network. Any user can create new native tokens and deploy smart contracts directly onto the Ethereum blockchain with no permissions required.

For these contracts to be provably fair, the full source code must also be made publicly available. This is essential for any gambling application, as users need to be able to ensure the contract will do exactly what it claims. The requirement for developers to make their code open source leads to an interesting side-effect. If the economic incentives behind a specific smart contract can be improved (for example to lower the house edge charged to users on bets), then it is trivial for another developer to fork the source code, update it, and redeploy it.

Any fixed odds betting platform that charges an edge above the mathematically minimum possible edge can be beaten, and it is simply a matter of time before a cheaper platform modifies their code and puts them out of business.

Given that it is not possible to offer zero edge bets with a fixed supply token, EdgeFund therefore must offer the mathematically minimum possible edge. The rewards for the winner of the ‘race to the lowest house edge’ are significant.

The Kelly Criterion

EdgeFund is a platform that will accept fixed odds bets with the lowest mathematically possible house edge based on a modification of the Kelly Criterion. The Kelly Criterion is traditionally used by a bettor to calculate the optimum size of his bet when he knows he has a positive edge. Kelly strategy is the optimum strategy in most scenarios, and will out perform any other strategy in the long run.

Game operators pass through bets from their users to the EdgeFund platform, requesting the desired payout odds for their user, and the total edge they are charging the end user. EdgeFund uses provably fair random number generation to determine the outcome for each bet. Winnings bets are paid out from its own bankroll. The guaranteed risk-free profit is returned to the game operator regardless of the outcome.

Therefore, game operators do not need their own bankroll, and can offer fixed odds betting games with zero financial risk to themselves.

The EdgeFund smart contract calculates the lowest possible house edge it can offer for each bet, based on the Kelly Criterion. This is a function of several factors: the current bankroll of the smart contract, the bet size, and the desired payout odds.

Using the formula in this way allows for the fixed odds smart contract to accept the maximum range of bet sizes and odds with a very low house edge, while still protecting the bankroll. These parameters are calculated dynamically to ensure EdgeFund has zero risk of ruin, and indeed expects an accumulation of bankroll within the smart contract over time.

As the bankroll increases over time, EdgeFund’s internal house edge can be returned to token holders or game operators by either allowing the circulating supply to reduce over time, or offering the excess bankroll for true zero edge bets.

A Positive Feedback Loop

By offering the optimal solution for offering fixed odds, EdgeFund can attract token holders and token users faster than any other platform due to three network effects.

  1. Having the optimum rate of accumulation of tokens inside the smart contract / lowest possible edge will ensure EdgeFund has the fastest growth rate of any fixed odds smart contract.
  2. This will cause EdgeFund to have the largest liquidity pool, which will allow us to offer the lowest house edge and largest bet size range.
  3. Token holders seeing the first two network effects in action will be drawn to purchase further tokens in EdgeFund, as they will expect larger value gains than can be found elsewhere.

Once interest in EdgeFund begins, a positive feedback loop is created whereby EdgeFund will become the cheapest way for game operators to offer fixed odds. Game operators can start businesses with no bankroll and immediately be able to offer bets with large potential payouts, whilst making profits on every bet at zero risk. As the value of the bankroll builds, even existing game operators will find it more profitable to use this platform and reduce their risk to zero.

We see the combinations of these network effects being incredibly powerful and leading to EdgeFund being the de facto decentralized fixed odds platform. Once the bankroll has sufficient value, it will be near impossible for any other decentralized fixed odds platform to provide cheaper odds or a larger bet range.

Holders of many cryptocurrency tokens do not currently have any way to obtain a return even given steady use of the token. If they were to instead purchase EdgeFund’s native tokens, those users could expect an increased return.

This platform will be attractive to both token holders looking for increasing value, and to fixed odds game operators. It will allow for start-ups all over the world to have access to liquidity that they would never be able to achieve on their own. Even larger game operators will find more profit and less risk by using EdgeFund once the bankroll value is higher than their own.

We believe that EdgeFund can offer an extremely attractive platform for both game operators seeking access to liquidity, and to cryptocurrency investors seeking a return. Make sure and follow EdgeFund or myself to receive regular updates.

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I am currently working on EdgeFund, an open-source platform which offers a decentralized shared bankroll on the Blockchain. To learn more about EdgeFund, please visit our website. Join our Telegram group to chat to the team and follow us on Twitter!

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