Truly 'Decentralized' Online Casinos Represent a Paradox Problem

Over the last couple of years, we have seen a lot of talk centered around the idea of cryptocurrency casinos. There have been those who have banged the drum for the benefits of crypto gambling, whereas others – as reported on Gambling 911 – have claimed crypto and off-shore gambling represents a clear and present danger to both players and the traditional industry. 

But for all the debate over cryptocurrencies and their risks, it’s worth noting that they represent but one element of a broader movement. Crypto is an aspect of “web3”, the moniker for the next generation of the internet, one that aims to be characterized by blockchains, peer-to-peer networks, and the idea of decentralization. The latter term is perhaps the most fundamental to the ethos of crypto and web3. Proponents believe that there is a new dawn for a society where institutions like banks no longer control money, and Big Tech no longer controls the internet. 

House Edge Should Be Viewed as a Positive 

We can’t get into the philosophical debate over whether decentralization is truly possible, but it’s enough to say for our purposes here that some have been talking about decentralized online casinos. In short, that’s a casino without “the house”. Blockchains, crypto, and the other elements of web3, perhaps including the metaverse, could offer online casinos without having an owner. Funded by players with no overarching goal of making a profit – sounds great, right?

But there is an inherent flaw in the idea. Every casino game needs to have a house edge. Games like online blackjack might have a very slight house edge – as little as 0.5% – but it’s still enough for the casino to make a profit, and thus ensure that it can offer its services to players. 

Now, it’s not a given that all decentralized casinos would have zero-house-edge games, but many of the idealists calling for their creation have suggested as much. If so, how would they be funded for their operations? As we mentioned blackjack there, consider it this way: how are the live online blackjack croupiers going to be paid if the casino doesn’t make a profit. The answer, according to proponents, lies with cryptocurrency. 

Beyond casinos, there have been plenty of models of peer-to-peer businesses. An example is StepN, a walking app that pays you (in cryptocurrency) to get healthy. You need to buy in to the program by purchasing a pair of virtual sneakers. But, in effect, you are told that if you meet your goals, you will make a profit on your buy-in. The problem, of course, is that getting a profit out of StepN assumes its native cryptocurrency, GMT, will always hold value. Moreover, that value is predicated on the assumption that people will keep joining. Evidence suggests that it is built on shaky foundations.

Uncertainty Can Lead to Severe Losses  

The reason we mention StepN is that decentralized casinos would broadly follow the same model. A native cryptocurrency would be used as a reward for those running the network. And while the idea of having a casino as its own ecosystem with a self-sustaining economy sounds nice on paper, it is flawed in practice. 

2022 saw many cryptocurrencies lose a lot of value, and many of the worst hit were altcoins based on projects like StepN. Worse still, some crypto like Terra Luna lost all value and became worthless. The rewards for holding these coins were all well and good until the market sentiment changed, and then they became worthless or, at best, worth only a small percentage of their value. 

And that, perhaps, is our point. If I go to a real “centralized” online casino to play blackjack, I know that the house edge is less than 1%. An advantage for the house, yes, but it feels like a trade-off for the security offered. I know if I win that I will get my money. I also know that the dollar I bet will be worth a dollar when I cash out. That peace of mind is worth the trade-off in house edge when you compare it to a virtual currency that could drop in value by a large percentage overnight. 

None of this means to say that crypto and web3 are inherently negative. There are many exciting new technologies in the sector that could augment the casino and betting industry. But the principles of math and economics still matter. If a product can only be sustained by more people buying into it over time, that’s not some utopian business model: it’s a pyramid scheme.