A Blog About Online Gaming and Entertainment Regulations
Uses and Abuses of Decentralization in Gambling
Decentralization has been the selling point of many platforms using blockchain-based technologies including cryptocurrencies such as Bitcoin. Many believe that decentralization by blockchain has the potential to disrupt multiple industries from finance to art. These decentralized equivalents are called ‘dapps.’ And over the past few years there have been several attempts to decentralize and disrupt the gambling industry with these applications.
Decentralized applications differ from their centralized counterparts in how they are controlled and maintained. Such applications exist only throughout a distributed network of computers rather than on a single, centralized point to which all users connect. This entails that there is no central authority or intermediary overseeing, controlling, or otherwise enforcing interactions and transactions between users because these powers are distributed among them. All interactions are recorded on the distributed ledger technology of the blockchain network and processed through smart contracts, which is the technical way to say that all user interactions in the network are publicly visible and autonomous.
In the context of gambling, this means that there is no ‘house’ or central operator facilitating wagers. On traditional gambling platforms, a centralized operator or ‘the house’ controls the entire wagering process; all transactions are hosted, processed, verified, and executed by and through them. In gambling dapps, there is no such operator because the applications exist only in the decentralized network as a series of self-executing software protocols. The software itself is the operator, software which exists ‘on the blockchain’ or in the publicly accessible network. Because there is no single entity behind the operation and use of the application, there are substantially less regulations and formalities. For example, players need only connect their wallet address to the relevant network to place bets rather than have their identity verified in accordance with the legal regulations under which a central authority would need to operate. This makes the entire process anonymous. Even further, because there is no ‘house’ in the traditional sense, and so no need for a noticeable house edge, gambling dapp enthusiasts maintain that games are ‘provably fair’ as well as transparent since the software code is accessible to any user.
Proponents of gambling dapps tout these features as significant enhancements to the traditional gambling experience—more transparency, anonymity, fairness, and accessibility are their primary claims. Few, however, are straightforward about the potential drawbacks of such platforms.
The most readily apparent problems arise out of the fact that there aren’t many people who use gambling dapps. DappRadar, a site which tracks decentralized apps created on various blockchain protocols, stated that there are less than 50 gambling dapps that attracted more than 50 daily active unique wallets.  The two most popular gambling dapps—Serious Dice and TTGuess—each currently attract little more than 20,000 active weekly users, with a steady and steep drop in the positions that follow.  For example, the 8th most popular gambling dapp currently has less than 1,000 active users this week. Because most gambling dapps feature their own currencies or ‘tokens,’ which typically have a relatively low number of owners, exchanging tokens can be difficult. Since the tokens are not widely circulated, owners may be required to undergo an obscure exchange mechanism process outside of the more well-established exchanges, a process which, on occasion, can result in lost tokens. In one decentralized casino, BetHash.io, users in their support Telegram group sometimes find themselves unable to exchange currencies for one another, either to place bets or cash out.  In order to mitigate low participation and retention, gambling dapps have turned toward rewarding their most active users with cryptocurrency dividends and staking mechanisms. Decentralized casinos aren’t the only ones that suffer either. So too do decentralized sportsbooks suffer from low liquidity. This makes them incapable of offering a large selection of bets and so incapable of functioning as a proper sportsbook. There are currently no decentralized sportsbooks with a significant number of users.
The more serious drawbacks of gambling dapps are due to lack of serious regulatory measures and the anonymity found on decentralized gambling platforms. There is little recourse for users who fall victim to financial fraud or even non-malicious forms of financial loss. For example, MintDice, in their article praising decentralized casinos and gambling, noted that the “absence of any stringent regulatory measures sometimes works in favor of criminals. Due to the anonymous nature of decentralized gambling, it has somewhat become the preferred financial plan for fraudsters.” Even further, decentralization does not necessarily imply democratization. Indeed, the lack of a central operator means that users can often have little power or recourse if things go awry, whether it be because of software or user-error, especially on smaller platforms. Additionally, these platforms do not seem to have a process (or at least not one that is readily apparent) for collective decision-making among users. On more developed decentralized sites, users are typically forced to seek informal assistance on external Discord or Telegram servers. Combined with the complexity of breaking into cryptocurrency and blockchain-based platforms, new users may find themselves frustrated in situations of apparent helplessness. Rather than learning to navigate a complicated crypto-enthused world, casual gamblers may be inclined to stick with a more traditional centralized platform with regulations in place for user protections.
State regulators play a critical role in maintaining the integrity of industry, regulators to which centralized gambling platforms are beholden. New Jersey’s Division of Gaming Enforcement (DGE), for example, has three broad responsibilities relevant to online gambling: (1) license applicant investigations, in which the DGE does preliminary investigations into the fitness criteria of good character, honesty, and integrity of prospective applicants on the basis of which the Casino Control Commission (CCC) grants casino licenses; (2) regulatory enforcement, in which Regulatory Enforcement and Regulatory Prosecutions Bureaus enforce compliance to the laws of the Casino Control Act and the CCC Rules and Regulations; and (3) the monitoring casino operations, in which the DGE assures regulatory compliance and investigate violations with respect to day-to-day casino operations.  Any criminal activity from simple theft to “technologically complex cheating schemes and conspiracies to commit financial fraud” fall under the purview of the DGE’s Enforcement Bureaus.  These sorts of regulatory measures are found across the board in states with legalized gaming. Decentralized gambling applications naturally evade these regulations, which are enacted to maintain public confidence in the industry—hence gambling dapps’ low, stagnating participation numbers and the concomitant issues. The mere presence of such regulatory measures evinces a procedure by which users may lodge complaints or find further recourse if deemed necessary. Such assurances are at the heart of consumer confidence in gambling platforms because they require a transparent and fair process, one that decentralized platforms are presently incapable of providing. Users need not beware of fraud or any other malevolence. Any users of centralized and regulated gambling platforms will find that games are already transparent and fair, because that is exactly what is required for a license in the first place. And if by some chance this is not so, regulators are there to ensure that this is achieved.
*Jake Gray is a graduate of Columbia University and an established technology researcher, currently working in the betting and futures space as a consultant to a variety of operators.