Initial Coin Offerings (ICOs) have typically been associated with ‘pre-mined’ blockchains, whereby the blockchain’s cryptocurrency is discounted for an initial period of time as a means to help rapidly drive critical mass and utility. This changed with the introduction of the Ethereum blockchain, a blockchain that allows developers to deploy their own proprietary Ethereum tokens with little to no friction by using the Ethereum network’s existing security and infrastructure. Such rapid deployment of new tokens has given rise to 15 Ethereum-based ICOs in the past few months alone, and most notably enabled Golem to raise $8.6m in a matter of minutes towards the end of 2016. Ethereum has now carved itself out as the go to platform for entrepreneurs and developers looking to raise funds through an ICO, and more recently this trend has veered towards the booming cryptocurrency gambling space.
Decentralized gambling was cited by Ethereum founder Vitalik Buterin as an application that would have numerous benefits over the existing centralized system, “creating gambling services with near-zero fees that have no ability to cheat”. 2 years on and this application is now only beginning to be realized, and the developers that have written code for such decentralized gambling services have also harnessed the crowdfunding potential of initial coin offerings.
The problem for the investor – which gambling ICO to partake in, if any? Of the three high profile recent cases, vDice sold vSlices (VSL) to the tune of $1 million in less than 90 minutes when it went live November 15 last year, whilst two years prior to this Breakout Gaming sold only $136,000 worth of Breakout Coin (BRO) towards its $350,000 goal in the four weeks leading up to November 19. Etheroll (ROL), a decentralized dice gambling game, similar to vDice, launched its ICO on February 13th 2017 and raised $160K over a 24 hour period. So how do these ICOs work as an investment vehicle?
vSlices are programmed to increase in value by 30% in the three weeks following the ICO going live – money itself is on sale. On top of that, a recent analyses estimates vDice investors stand to make 16.88% ROI per year through the tokens which automatically distribute 50% of the industry standard 1.9% house edge back to vSlice holders. Etheroll is also set up to pay investors back on the profits derived from the service; every 12 weeks investors will receive a proportional payout based on the number of tokens they hold as percentage of the total distributed in the ICO. This payout schedule runs on a smart contract deployed to the Ethereum blockchain, and the code is fully open to review and audit. Meanwhile those who bought Breakout Coins in a second ICO last summer didn’t buy enough to reach the first rung of of six tiered rewards scheme.
Both Breakout Coin and vSlice promise to be the unit of exchange not just for gambling sites but for platforms of gambling sites. ‘Soon we may have geeks in their bedrooms whipping up gambling games in the same way they make YouTube shows, or make music. It will cost them nothing to stick the code on the Ethereum network. Instantly they will have a global audience,’ gushes one vDice press release. It’s a case of anything you can do I can do meta: the further you expand your platform the more virtual space you hypothetically colonise. The problem is this frontier represents a Wild West of snake-oil hype and jury-rigged codes of conduct.
One aspect that many investors may forget when embroiling themselves in the hype of what is an exciting new asset class, is that the business models on which these ICOs are built are significantly lacking. Etheroll for example, provides a technically ingenious service, but as a gambling platform, it falls flat on delivering the thrilling experience that one would find at the likes of 888.com or PaddyPower. Etheroll’s sole premise is that players roll a random dice and win or lose in a considerably uneventful and uninspiring manner. For investors to actually see a percentage of the profit from Etheroll, players have to actually play there – and with nothing in the way of marketing and retention strategy (deposit bonuses and affiliate programs being the industry standard), there’s little reason to think that Etheroll will last in such a competitive online gambling landscape. It’s important not to forget that the vast majority of players do not care if the site that they bet at is “provably fair”, decentralized, “peer-to-peer” or operates by executing smart contracts. Only the most hardcore of cryptocurrency gamblers would see value in this, and the market size of such a demographic is embarrassingly small when compared to the broader 40 billion dollar online gambling industry that investors crave.
On the other hand, these new gambling ICOs are breaking new ground and setting a path for what may be the investment vehicle of the future. The smart contracts on which they operate are accessible to anyone in the world, and the contract itself is guaranteed to pay out to its investors on an unbreakable schedule that executes autonomously. This premise in itself is an extremely powerful one, and one that is likely to change the way in which startups raise funds in the future. However – as has been seen since the dawn of capitalism – it is the value of the business model itself that makes or breaks an investment.