Thursday, January 5, 2023

Is crypto just gambling?

Is crypto just gambling? That's a point I made in my recent "let it burn" blog post. (And I notice that the ECB's Fabio Panetta recently said the same thing, describing crypto as a "gamble disguised as an investment.") In this short post I want to clarify what I mean.

What the word "crypto" means (in my universe, at least) is the array of financial applications built on a new kind of database, otherwise known as a blockchain. Some blockchains include Bitcoin, Ethereum, Solana, Tron, and Dogecoin. What makes these databases novel is that they are open(ish) and decentralized(ish). Contrast this to my bank's SQL database, which is 100% under my bank's control.

Before blockchains came along, financial providers were already housing all sorts of applications on their closed internal databases. These financial applications included banking, stock trading, money transfer, brokerage, and insurance, as well as less savory financial applications like gambling, betting, and triple-levered ETFs. And of course, our pre-2009 databases also hosted downright illegal financial applications like pyramid schemes and ponzis.

Then blockchains arrived, beginning with bitcoin in 2009. And people started to replicate on blockchains the financial applications that had previously only been built on regular databases.

And now we can get to why I say that crypto is just gambling. To date, the most popular financial applications being hosted on blockchains are all gambling applications.

The dominant form that blockchain-based gambling takes is betting on the prices of various unbacked tokens including dogecoin, shiba inu, xrp, cardano, ether, litecoin, and bitcoin. The price of these tokens is arrived at via a purely self-referential process whereby players gamble on what "average opinion expects the average opinion to be." The resulting price is so spectacularly erratic that a good player can buy some dogecoin at the beginning of February and make 100% by the end of the month, or 10,000% by December.

Gambling isn't the only financial application to be built on blockchains. A number of interesting non-gambling blockchain-based financial applications have emerged, too. These include applications that offer banking (MakerDAO), trading (Uniswap), non-bank lending (Aave), and money transfer (USD Coin and Tether).

However, the aforementioned non-gambling financial applications that have been built on blockchains mostly serve people who are themselves gambling on the prices of dogecoin, bitcoin, shiba inu, and other unbacked tokens. Most of MakerDAO's loans, for instance, have historically been to gamblers who want to speculate on the price of ether.

And so once again, that's why I say that crypto is just gambling. Most people who use blockchains are either directly gambling on unbacked token prices, or are providing financial services to these gamblers.

At the moment crypto may just be gambling, but that doesn't mean it'll always be just gambling. Eventually what we'd like to test is whether blockchain-based financial applications have the ability to emerge from the self-contained gambling cocoon they currently occupy in order to (safely!) serve the massive population of non-gambling financial consumers. For instance, in the future might it be possible for a small business to get an unsecured loan from MakerDAO as easily and cheaply as they can from a local bank or credit union?

For now, we don't know the answer to this test. It could be that blockchain-based financial applications simply lack the moxie to transcend the earthly gambling plane into something more broadly useful, and offering gambling on unbacked coin prices and services to those gamblers is all they'll ever amount to. Or maybe not. It'll be interesting to see the results of the test.


  1. The essence of civilization is that we (i.e., government) insure ourselves from catastrophe, and protect ourselves from barons (i.e., gangs, conquerors and the wealthy). Partially to this end, we enact regulations.
    Although blockchains can be used to replicate the financial services of regulated banking entities, the blockchain entities themselves will have access interfaces and hacking vulnerabilities that themselves need regulation, not to mention service entities that are similar to existing financial services. Where then is the dramatic access of freedom?
    Currency that defies the efforts of government (civilization) from adjusting it to economic conditions is the wet dream of feudalistic libertarians, who can't see the rise of barons and serfdom that follow extreme laissez faire.

    1. Fair point, and I don't disagree. When I wrote in my post that I hope that blockchain applications can serve the massive population of non-gambling financial consumers, I added the word "safely" in brackets. What I meant by that is that they need to abide by the existing laws and regulations of the land.

  2. I think your crypto=gambling take is spot on. At the end, however, you seem to be quite generous by leaving the possibility open that MakerDAO could make an unsecured loan to a small business. It is difficult to see how MakerDAO (or another application built on smart contract infrastructure) can overcome the challenges of the oracle problem and accurately assess the ability and willingness to pay of a real-world borrower. Connecting the blockchain world to the real one feels like a bridge too far, unless you introduce an intermediary into the equation.

    1. Yes, connecting the two would require an intermediary. MakerDAO is already making real-world real-estate loans through New Silver:

      That's just one example.

  3. There are different types of licenses and certifications in the gambling industry, not just the operator b2c online gambling license you refer to, i.e b2b providers, platforms and game developers are certified in many jurisdictions. So your concerns about the diversity of the industry and products could be addresses by having a similar framework, i.e a b2c exchange could follow a set of rules similar to an online sportsbook while tech/liquidity/b2b providers could fit into a different category.
    I agree overall there’s a lot of potential overlap. And regulated online gambling is now >>> than unregulated, despite all the operational and marketing restrictions.

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