Stablecoins solve the decade-old problem of price volatility within the cryptocurrency space. Often pegged to the dollar, stablecoins use various mechanisms to ensure that the peg stays intact. One of the most interesting implementations of this comes from the Ethereum blockchain’s DAI stablecoin – an autonomously governed token that balances coin supply to ensure stability.
These stablecoins have found utility across all types of cryptocurrency markets where volatility is detrimental to the user experience. Stablecoins have long been used on crypto-exchanges, where Tether (USDT), the dollar-backed stablecoin built by X, has been used to allow traders to retreat to the safety of fiat whilst remaining on the blockchain without touching the traditional banking system.
Increasingly, stablecoins are being looked at to improve the Bitcoin and crypto gambling experience. For gamblers, the volatility of Bitcoin and Ethereum is enough of a gamble in itself; compounding this risk with the spin of a roulette wheel is a rollercoaster that very few are willing to experience. A Bitcoin deposit at an online casino can see winnings slashed by 10% or more on the basis of a market downturn. Of course, the opposite also holds true, and no doubt acts as a draw for many who see the potential for riches in Bitcoin’s millionaire-making potential. The problem is that those in the middle – the mainstream gamblers – are currently left out of cryptocurrency gambling entirely.
What stablecoins can be used for gambling?
Tether was one of the first stablecoins to enter the crypto-sphere, however it does not come without its own issues. Tether is backed 1-to-1 by USD reserves but not much is known about their existence. Skepticism has been driven by the lack of public audits and the lack of transparency has oftentimes resulted in a sustained departure from its $1 peg. Tether is also not programmable; while a small portion of Tether exists on the Ethereum blockchain, the majority of its circulation resides on the “Omni Layer”, a platform built on top of Bitcoin.
For this reason, Tether is considerably one-dimensional. Its centralized issuance is also cause for concern, particularly given that there is no clear stance on gambling and the potential for having funds frozen is far from zero. More recent stablecoins, such as Gemini’s GUSD and Coinbase/Circle’s USDC are built as ERC20 tokens on Ethereum and therefore derive the benefits of the Ethereum blockchain, but they still suffer from the centralized issuance and governance problem.
DAI, the stablecoin issued via the MakerDAO platform, is the only stablecoin so far to achieve both decentralized governance (freedom from confiscation) and Ethereum-compatibility. We will see in the next section why such a token can spark the next evolution of the crypto casino market.
Why is Ethereum important for the future of fair gambling?
Ethereum is the most distributed and secure smart contract platform in the market. Contracts deployed to Ethereum are extremely valuable as they are guaranteed to operate with a high degree of finality and a strong resistance to attack. A bet placed at a smart contract casino can not only payout instantly with no middleman, but the outcome can also be transparently audited for fairness (all the smart contract code is open source).
Ethereum, then, goes a step further than the typical Bitcoin casinos that have been offered for the past several years. While a Bitcoin casino game can be provably fair, nothing is stopping the operator from seizing funds or delaying a withdrawal. While malicious casino operators are the few and not the many, a more likely issue comes in the operator’s ability to take a conversion fee, particularly at the casinos where Bitcoins must be exchanged to USD or other fiat currencies before they can be withdrawn.
Ethereum is the backbone for stablecoins with many opting to use the ERC20 token standard – a standard which allows the coin to interact with the vast majority of applications (gambling and otherwise) deployed to the blockchain. An Ethereum stablecoin provides its user with enormous utility, allowing them to bet at a trustless, provably fair casino with the benefit of price stability and honest, autonomous payouts.
If Ethereum stablecoins are so good, why are they not being used at casinos today?
Ethereum stablecoins are a relatively new endeavour. MakerDAO’s DAI went live in Q2 2018 and the platform still needs to demonstrate long-term viability as a safe and stable peg before casinos will be willing to process DAI deposits and withdrawals. The other reason is that smart contract casinos have a few complexities that need addressing:
Every bet at a smart contract casino needs to have at least one block confirmation before it can be considered valid and for the random number to generate. This means that – as a minimum – each bet must wait roughly 15 seconds before its outcome can be determined. This problem has been resolved by FunFair who employ a type of “state channel”, aptly named a “Fate Channel”, to take transactions offchain without significantly compromising security. FunFair, however, use their own volatile cryptocurrency (FUN) for placing wagers, reintroducing the problem of a lack of stability. FunFair have no intention of introducing stablecoin banking options to their platform, not least because it will upset their many investors who bought the token on the basis of its “forced” demand.
Smart contracts are complex and Ethereum developers are expensive. The developer community surrounding Ethereum is undoubtedly growing at a rapid pace, however the technology is new and even the best developers are capable of making mistakes (see Parity Technologies and The DAO from 2016). When dealing with programmable money, the battle between securing code and exploiting code is often asymmetric – an attacker stands to gain far more than the developer might lose. Users have to somewhat trust other developers to audit code, placing some faith in the security of a smart contract casino on the basis of nothing more than its continual function. This is all changing thanks to better Solidity frameworks from the likes of OpenZeppelin as well as security standards being developed by Consensys, however there is some way to go.
With everything blockchain, the hype precedes – often by many years – the reality. It is clear that stablecoins, with their smart contract compatibilities and stable value, will eventually lead to a wholesale “upgrade” of the cryptocurrency gambling sector, however the timeline may still be years out. While the list of smart contract casinos is increasingly being added to (see here: https://thebitcoinstrip.com/ethereum-casinos/), the acceptance of stablecoins into the ecosystem is a little more tentative with major players yet to move away from their own volatile ERC20 tokens.
It is this author’s opinion that the demand for stablecoin casinos will be a consumer-led one and that casino operators will soon cotton on to the idea that Bitcoin gambling, while incredibly fun, isolates a mainstream audience who simply cannot stomach the enormous volatility that comes with each spin.
Nick Hawke, Managing Director, TheBitcoinStrip.com