What will gambling do to the bitcoin block chain?

What are gambling transactions doing to the block chain? According to Jeremy Liew, a partner at Lightspeed Venture Partners, a large percentage of bitcoin transactions are gambling-based. With a block chain now over 9Gb in size, and becoming increasingly tedious and difficult for new clients to download, that’s becoming a problem. How are gambling-based transactions contributing?

Liew points to the most recent available financial report from SatoshiDice, which is the most popular bitcoin gambling site. That site processed 5,222,994 bets in 426 days of operation (that’s an average of 12,260 bets a day).

SatoshiDice sends a reciprocal transaction, win or lose. The losing transaction is a small ‘consolation’ transaction with a tiny percentage of the house gain. In theory, this means that the site has been putting double that transaction load on the block chain.

In practice, it is possible to place more than one bet per transaction, which may mean that it is less than double. Still, this means that the site could account for anything between 12,260 and 24,520 transactions per day on average, from inception until the end of June. We’re betting that it is towards the higher number.

Those figures run until June this year, shortly before Erik Vorhees sold the firm and it stopped reporting. In May and June, overall transaction numbers on the bitcoin network ranged from around 50-60,000, occasionally dipping to 40, and sometimes peaking up to 70,000 at times, suggesting that SatoshiDice does indeed account for between a quarter and a half of transactions, and probably towards the higher end of that range.

Many of these transactions are small, because just as many gamblers like to sit there all night with buckets of coins playing the Vegas slots, online users like to bet small amounts of money, lots of times.

Over at nascent site Bitpotluck, which started at the beginning of August, the founder, Justin, says that most players gamble the 0.001 BTC minimum entry fee. Satoshibet, another small-time player, processes 2BTC per day across 40 transactions, averaging 0.05BTC per bet. And at House of Bitcoins, which went live in mid-late June, each transaction is typically 0.005 to 0.1 BTC, says owner Matt Miller.

Lots of small bets rather than a few high rollers can fuel block chain growth. What can be done about it? House of Bitcoins’ Miller isn’t sure, “but I don't necessarily think it's a bad thing,” he says.

“For bitcoins to gain in popularity and move mainstream, the network will need to be able to handle a great deal of traffic. The gambling sites just require this problem to be addressed earlier than it otherwise would have been.”

But others claim to be processing far more bets. Another site, PrimeDice, says that the site is processing over a million bets each day since relaunching. “Prior to that it was a bit under 100,000 bets a day”, says “Stunna”, the site’s spokesperson.

That’s a lot of bets, if true. Why don’t they make it onto the block chain? Because it processes them off the chain. Only 1000-2000 of its daily transactions are on the block chain, purely for deposits and withdrawals. It handles the rest on accounts in its own system, it says.

The same goes for Just-Dice, one of SatoshiDice’s other competitors, which spokesperson “Dooglus” says has processed 90 million bets. “Just-Dice has been responsible for less than 1% (or 27,000) of all BTC transactions. This means just over 13,000 transactions per month.”

“I think it is unfair to say that gambling sites in general are generating large numbers of transactions. A variety of bitcoin gambling sites have shifted to off-chain transactions this year,” adds PrimeDice’s Stunna. “There is really only one site putting heavy strain on the network and that would be SatoshiDice.”

Not quite. BetCoin ™ Dice, a relatively new player, also claims to be churning out a lot of transactions. That site, still relatively new, is one of three related gaming areas operated by the same firm.

Its addresses started taking inputs as early as 30th July, and at over 147,000 at the time of writing, its bet counter suggests it has been processing around 4,900 bets each day on average since then. It also returns consolation transactions, which if its figures are accurate means that it is responsible for up to twice that number of transactions, or some 9,800 transactions per day.

SatoshiDice vanity addresses are still some of the most popular addresses on the block chain, but BetCoin ™ Dice had two of its own in the 100 most popular addresses at the time of writing.

BetCoin ™ Dice is doing so well because the company behind it, Massive Luck Investments, has hundreds of millions in hard assets, and can afford the heavy lifting that it needs for advertising. It’s the same firm that took a 50% stake in Bitmine. Because of its strong Chinese presence, it is also garnering lots of custom from that market. 40% of all visits are from Chinese IPs, says a PR-shy senior exec.

He also argues that on-block chain transactions are necessary for a site to call itself provably fair. “People immediately would accuse us of fraud,” he says. By keeping all payouts on the block chain, everyone can see whether the payouts match the expected probabilities, he asserts.

But this isn’t the only way, says PrimeDice’s Stunna, arguing that a site can still maintain transparency even if it manages bet reporting via its internal systems.

The site uses three different 'seeds' (hashing inputs) to determine the random number from a dice roll: a secret seed, a server seed, and a client seed. The secret is a constant, maintained for a 24-hour period. The server seed can be changed, and the client seed is fully influenced by the user.

“This means that the user has full control over the number they can generate by choosing their own client seed, yet at the same time can't abuse this system by choosing winning seeds over and over,” says Stunna.

Secrets are published a day later, and can be used with the public server seed and the client seed to prove that the number was correct. “This gives us the same level of verification as a typical block chain-based site would have.”

Processing off the block chain carries another advantage, says Stunna. “We’re able to operate with minimal transaction fees as our users only pay a transaction fee on withdrawal and optional fee on their deposit. If we were on-chain, users would have to pay a transaction fee every single bet rather than once or twice per session.”

SatoshiBet’s spokesperson, who gives only his first name, Adrian, believes that off-chain gambling is the only way to scale. “I believe the future of bitcoin gambling is off the block chain, because you simply can offer the user a better playing experience,” he says. “So, I believe this problem will mostly solve itself as the market matures.”

The biggest challenge facing bitcoin gaming sites may be the high completion for relatively few players. “Although bitcoins have gained a lot of popularity this year, most people have still never heard of them,” says House of Bitcoins’ Miller. Contrast this with the broader online gambling market, and there’s a clear disparity. SatoshiDice made ฿33,310 ($4.29m) from May-Dec 2012. That’s not inconsiderable.

But as the market leader in bitcoin betting, SatoshiDice is a big fish in a relatively obscure pond. In 2012, the worldwide online gambling market across all currencies was worth $35.8bn. Clearly, there’s a lot left to play for.