Breaking Up the “Central Banks” of Online Poker using Ethereum Smart Contracts on Virtue Poker

Virtue Poker Blocked Unblock Follow Following Nov 7, 2017

The online poker industry has suffered from numerous scandals over the years creating a lingering perception of mistrust in the industry. In this post we will focus on one of the most fundamental problems with online poker; online poker rooms are essentially centralized banks with minimal consumer protections.

Definition of a Commercial Bank

A commercial bank, in the most simple definition, “is a type of financial institution that accepts deposits, offers checking account services, makes business, personal and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.”

A commercial bank makes money by charging higher interest rates on its loans versus the interest paid out to customer deposits. It is also important to note that banks are required to maintain a minimum reserve ratio against customer deposits, of which they cannot loan to businesses or individuals.

In the United States, customer savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which currently insures an individual depositor up to $250,000. This government insurance provides a level of security in knowing customer deposits are secure, even if a bank becomes insolvent.

Glass-Steagall

In 1933, after the Great Depression in the United States, faith had to be restored in the banking system after nearly 1 in 3 banks failed. This was the impetus for the origination of the FDIC as well as the US Banking Act which included Glass-Steagall legislation which required banks to separate their commercial and investment banking business. Essentially what this did was prevent the investment banking division from using customer deposits and making higher risk investments across four broad categories:

(1) dealing in non-governmental securities for customers

(2) investing in non-investment grade securities for themselves

(3) underwriting or distributing non-governmental securities

(4) affiliating (or sharing employees) with companies involved in such activities

Over time, many central banks began interpreting Glass-Steagall in more lenient terms eventually leading to its effective repeal in 1999. This eliminated the separation between commercial and investment banking and enabled banks to grow in size and engage in riskier activity. FDIC remained unaffected and customers are protected and insured.

The Central Banks of Online Poker

In online poker one can draw many parallels to the banking industry. For example a centralized operator must partner with numerous payment processors and financial institutions to enable players to freely deposit and withdraw funds from their platforms. Instead of making a spread between interest charged on loans versus interest paid on deposits, online poker operators make money via charging players rake on every hand played on their platform and many times through charging fees on player withdrawals.

And unlike banks, players’ deposits are not insured-if an operator is shut down, becomes insolvent, is seized, or goes offline, players very often do not have recourse to recoup funds held by the poker site.

Moreover, for many offshore operators, similar to the current dynamic found in the banking industry, there are not requirements for player deposits to be held separately from operational expenses.

Therefore players must blindly trust that their deposits are secure and appropriately managed with duty of care by the online poker operator.

Misuse of Player Funds

Full Tilt

On April 15th 2011, a day known as “Black Friday” in the online poker community, US federal prosecutors indicted the founders of the three largest online poker websites, PokerStars, Full Tilt Poker, and Absolute Poker, and those sites stopped offering real-money gameplay to US citizens. In a complaint filed in the Southern District of New York on September 20th, 2011 it was alleged that Full Tilt defrauded its customers by “misrepresenting to players that their funds deposited into their online player accounts were secure and segregated from operating funds.” In actuality Full Tilt used player deposits to “cover business expenses and pay hundreds of millions of dollars in distributions to professional poker players…and others who owned interests” in the company. On March 31, 2011, Full Tilt owed players over $390 million yet actually held only around $59 million in its bank accounts. Instead of separating funds, Full Tilt distributed $444 million to its owners over a four year period.

Beginning in August 2010, Full Tilt had issues finding payment processors the could collect money from its U.S. player bank accounts and and ultimately credited player accounts with Phantom funds — creating a shortfall of over $130 million. The company relied on the assumption that the amount of withdrawals from the site would be less than the money it actually held — and with the shutdown on Black Friday, this illegal scheme came to light.

Lock Poker

In 2015 Lock Poker, which had offered games to US residents, was shut down after failing to honor player withdrawals for nearly a year. The site grew in popularity after the Black Friday shutdown of the three largest poker operators.

Beginning as early as 2010, CalvinAyre.com warned that the company was under financed and beginning in 2014 players began to notice withdrawal requests were not being honored.

Lock Poker’s founder, Jennifer Larson, had used player deposits as personal spending money among other things. Players lost an estimated $15-$24 million.

The Virtue Solution: Removing Player Deposit Risk using Ethereum Smart Contracts

Online poker players should not be required to trust an operator with their money and thereby assume a burdensome and disproportionate level of unregulated counterparty risk. They should be protected and have faith that their money is secure.

On Virtue Poker, players never have to deposit money onto our site and never have to request and wait for a withdrawal. Our solution replaces this process using a combination of user-owned digital wallets and Ethereum smart contracts:

First, a player downloads Virtue Poker software and creates an account using a self sovereign identity solution like uPort. Included in our software is a locally stored private/public key pair (wallet). Players fund their wallet by transferring ETH or VPP (our native token) to their wallet address.

Demo of Virtue Poker, Account Address is a user-owned wallet

A poker table on Virtue Poker uses an Ethereum smart contract which includes the custom parameters of the game (# of players, buy-in amount, game type, minimum bet size, payout, etc):

Custom Parameters of a Poker game are included in the table contract

Players join a table by sending the buy-in amount to the table address and waiting for the transaction to confirm.

Players join a table by sending ETH to table contract address

When a player leaves a table (cash game) or when a tournament is over (Sit and Go), the table contract auto-executes and pays out each player balance owed directly back to their wallet.

Conclusion

There are numerous applications being built right now using Ethereum, but it is important to remember that not all applications require the use of a blockchain. However, our team believes that online poker is ripe for disruption, and a new solution that addresses the current pain points of the industry.

And while online poker has come a long way since Full Tilt, there is still a lingering perception of doubt and there is still a leap of faith taken by players when depositing money onto a poker site. On Virtue Poker, we eliminate this requirement, and our goal is to instill trust in online poker using this new technology.

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DISCLAIMER: The views expressed by the author above do not necessarily represent the views of Consensys AG. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum,please visit our website.