EdgeFund General FAQ – edgefund – Medium

EdgeFund General FAQ

As the EdgeFund team develop the platform, we find ourselves being asked a variety of questions. Here I have answered a few commonly asked general questions, and given two examples of the platform in use.

For a general overview of the EdgeFund platform see this article. The full white paper can be found at our website.

Any further questions please get in touch!

By Colin McCrae

1. How can game operators profit on every bet, even losing ones?

Game operators will pass through bets from their users to the EdgeFund bankroll smart contract. The type of bets will depend on the game format, but there will be three fundamental parameters passed on:

  1. Bet Size
  2. Payout Odds
  3. Total House Edge (or Win Odds)

The smart contract will determine the outcome of the bet by decentralized random number generation.

In the case of a winning bet, it will return the winnings to the game operator to pass back to the user.

Regardless of the outcome of the bet, the smart contract will also return the difference between the total house edge and the platform edge. This is revenue for the game operator, separate from the any user winnings, and is returned to the game operator by the smart contract after every bet, regardless of the bet outcome.

See Questions 5 and 6 for walk through examples.

2. How can this decentralized bankroll of tokens be trusted?

The bankroll of tokens will be stored in a smart contact, and only accessible via betting functions built into the contract code. Once the platform is at its final release, not even the EdgeFund developers will be able to alter how the smart contract operates. It will be fully decentralized.

Additionally, the code controlling the smart contract will be publicly view-able. Any party can check the code, have it audited, and be sure that it operates as expected.

3. Why Can’t EdgeFund Offer Zero Edge Bets?

This is an excellent question, and is best answered by the following thought experiment.

Imagine two people choose to bet $10 against each other on the flip of a fair coin. After each flip, the losing player must pay the winning player $10 from his or her personal bankroll. Now, if both players start with $100, it is just a matter of time before a long enough run of ‘bad luck’ strikes one player and he or she is bankrupted by the other player. Since they both start with $100, the set-up is symmetrical, and they both have a 50% risk of ruin if they continue this series of bets until one of them has $200 and the other has $0 and is bankrupt.

In the case above, you can see that both players have a long run risk of ruin of 50%, even though they both are betting at fair odds (there is no house edge). This would still hold true even if their bankrolls were much larger, although the average number of bets until bankruptcy would increase.

Now imagine the same scenario, except this time one player only starts with $10, and the other player starts with the usual $100. Both payers are still betting at fair odds and there is no house edge, one just has a bankroll 10 times that of the other player.

In this scenario, either player can still go bankrupt — there are still plenty of scenarios where the short-stacked player wins and the wealthier player goes bankrupt. In fact, this happens more than 10% of the time.

As you can see by this scenario, even having a substantially larger bankroll does not completely protect you from risk of ruin. It simply makes it less likely that it will be you who goes bankrupt. You still have a non-zero risk of ruin.

The only scenario where a zero house edge can truly be offered ad infinitum where the house has no risk of ruin, is where the house has an infinite bankroll.

Therefore EdgeFund must charge at least a small edge.

4. What is the Kelly Criterion?

The Kelly Criterion is a formula used to determine the optimal size of a series of bets where the bettor has a positive edge (i.e. the odds are favorable). It was originally derived by John Kelly, Jr. in 1956 during his time at Bell Labs. For a given bet, where the probability of winning and payout odds are both known, the formula returns what the bet should be as a fraction of the bettor’s current bankroll to optimize long term profit.

The bet size that satisfies this formula is known as the Kelly Bet, and sizing bets like this is known as the Kelly Strategy.

The formula provides the interesting result that even when the payout odds are fair when compared with the probability of winning, you should not bet at all. This demonstrates that no matter how big your bankroll or how small your bet, you cannot make a Kelly Bet without having a positive edge.

The EdgeFund bankroll smart contract therefore must charge a small edge to protect it from ruin. EdgeFund uses the Kelly Criterion to calculate the minimum it must charge for each bet.

5. Can you give an example of a casino game bet placed through EdgeFund?

A good example would be a user betting on a European Roulette game offered by a game operator — say a $100 bet ‘straight up’ on a number.

The rules of European Roulette fix the payout odds of this bet at 35/1 (decimal odds of 36) — this is to say that a winning bet will payout $3,500 plus return the original $100 bet. The rules also fix the win odds at 36/1 (decimal odds of 37) — this is to say the probability of the bet winning is 1 in 37 (2.70%).

The game operator sends a transaction to the EdgeFund smart contract with three key parameters:

  • EGDE tokens worth $100
  • Payout odds = 36
  • Win odds = 37

Let’s now assume that the EdgeFund smart contract has a bankroll of $1,000,000 worth of EDGE tokens at the moment the bet is recorded on the blockchain. The smart contract code determines that the edge it needs to charge is 0.35% (found using the Kelly Criterion formula).

Decentralized on-chain random number generation then determines whether the bet is a winning bet or not, based on the probability implied by the win odds.

In the case the bet evaluates as a win, the smart contract will return EDGE tokens worth $3,602.35 to the game operator (the user’s $100 bet plus $3,500 winnings plus $2.35 in revenue).

The game operator’s revenue is the difference between the total edge, and EdgeFund’s edge: $100*(2.70%-0.35%).

If the bet loses, the game operator will still receive the $2.35 worth of EDGE tokens as revenue.

6. What about a slots game placed through EdgeFund?

The only different between a slots style game and Roulette type game from EdgeFund’s point of view, is that rather than win odds we now specify the overall house edge.

Say a user is making a $1,000 bet at a game with payout odds of 8/1 (decimal odds of 9) — this is to say that a winning bet will payout $8,000 plus return the original $1,000 bet. For this example, let’s say the game operator has limited the overall house edge of the game to 10%.

The game operator sends a transaction to the EdgeFund smart contract with three key parameters:

  • EGDE tokens worth $100
  • Payout odds = 10
  • Total edge = 10%

Let’s now assume that the EdgeFund smart contract has a bankroll of $1,000,000 worth of EDGE tokens at the moment the bet is recorded on the blockchain. The smart contract code determines that the edge it needs to charge is 0.8% (found using the Kelly Criterion formula).

Decentralized on-chain random number generation then determines whether the bet is a winning bet or not, based on a probability calculated from the payout odds and total edge.

In the case the bet evaluates as a win, the smart contract will return EDGE tokens worth $9,092 to the game operator (the user’s $1,000 bet plus $8,000 winnings plus $92 in revenue).

The game operator’s revenue is the difference between the total edge and EdgeFund’s edge: $1,000*(10.0%-0.8%).

If the bet loses, the game operator will still receive the $92 worth of EDGE tokens as revenue.

If you found this article interesting, please hold down the clap button below. Follow me on Medium to see more content like this.

I am currently working on EdgeFund, an open-source platform which offers a decentralized shared bankroll on the Blockchain. To learn more about EdgeFund, please visit our website. Join our Telegram group to chat to the team and follow us on Twitter!

Hayden P.

A blockchain and cryptocurrency enthusiast

You may also like...