Virtue Poker Token Sale (ICO): P2P Online Poker - Smith + Crown

Virtue Poker Token Sale (ICO): P2P Online Poker

Virtue Poker is a peer-to-peer online poker platform that enables the self-custody of player funds and aims to eliminate security and game integrity issues inherent to existing poker sites by using Ethereum smart contracts.

Virtue Poker is a peer-to-peer online poker platform that enables the self-custody of player funds and aims to eliminate security and game integrity issues inherent to existing poker sites by using Ethereum smart contracts. A peer-to-peer shuffling protocol reduces the risk of internal cheating and the need for players to trust centralized random number generators. Virtue Poker is developed by Consensys, a leading venture studio for Ethereum-based dApps. An upcoming token sale will seek to raise up to 25,000 ETH for development by offering the Virtue Player Point (VPP) token, which enables a staking mechanism, entitles holders to exclusive tournaments and rewards, and serves as a payment rail within the platform.

Core Issues with Existing Online Poker Sites

Virtue Poker identifies several key flaws in existing, centralized online poker sites, which stem from a combination of regulatory and technical hurdles. Virtue Poker’s value proposition is centered around three key goals: eliminate player deposit risk, improve gameplay fairness and trust, and reduce rake and player costs. Evaluating this value proposition requires understanding the architecture and issues of existing sites, including:

Cheating and Lack of Transparency

An online poker site’s success and reputation depends on maintaining effective and transparent security/anti-cheating procedures, as players must trust the operator to maintain a fair game. Methods of cheating that do not exist when playing live poker in regulated casinos can exist in online poker.  These include:

  • Bots – A poker bot is a software program that poses as a player on an online site. They use complex strategies to beat their human opponents, often accumulating significant winnings for their creators. Online poker sites attempt to identify bots by analyzing hand histories for suspicious behaviors, and will redistribute money to affected players if the bots are caught. There is no legal recourse that can be taken against a bot, apart from banning the associated bot and user account from that particular site. Bots are growing in complexity and availability, and prominent bot rings exist even on major online poker sites.
  • Multiple Accounts/Collusion – To circumvent other anti-cheating measures, players sometimes utilize multiple accounts, particularly on sites that permit anonymous users. On relatively regulated sites, such as Pokerstars, players are required to provide proof of identity. Utilizing multiple accounts or colluding confers an advantage, particularly in tournaments. This issue recently surfaced at America’s Card Room, leading many users to criticize its security practices.
  • Internal Cheating – Internal random-number generators and processes manage card shuffling and game integrity. While various security measures exist to protect sensitive data, such generators remain a centralized point of failure. Multiple sites, such as Ultimate Bet and Absolute Poker, have experienced major cheating scandals where company insiders gained access to player hand histories and hole cards during live games, exploiting players for tens of millions of dollars.

Custody of Player Funds

On existing online poker sites, players deposit funds through credit card, wire transfer, or other payment method and receive corresponding credit to their account. The sites, which operate in a varied landscape of gaming licenses and regulation, assume sole custody of all funds. This creates a significant counterparty risk for players, as centralized sites essentially operate as a bank with a single point of failure. Most notably, Full Tilt Poker was revealed as a ponzi scheme in 2011, after defrauding players of over $400 million. Additionally, grey or black market providers attract players by offering faster withdrawal times than traditional financial infrastructure.

High Rake

Rake, the scaled commission fee taken by a cardroom operating a poker game, is the primary revenue stream for online poker sites. Players at low stakes games pay a higher effective rake (as a percentage of amount wagered) than players at high stakes games. High rake at low stakes games makes it more difficult for players to earn a profit, which may discourage repeat business and encourage players to seek profit in other avenues of poker, such as live poker. Effective rake on Pokerstars is 3-10%, depending on stakes and game type. Some professional poker players have criticized these rake levels as excessive.

Regulatory Concerns and Market Fragmentation

The international regulatory environment surrounding online poker is highly varied, leading to uncertainty and market fragmentation. Legal providers operate from several Caribbean jurisdictions and the United Kingdom, offering compliant services to most of the international market. A notable exception is the United States, where online poker is effectively banned in all but three states. A variety of unregulated sites offer service to the US market, though with little oversight. As a result, player pools are highly fragmented and players in some jurisdictions have minimal recourse against bad actors.

The Virtue Poker Solution

The Virtue Poker application utilizes Ethereum smart contracts and a P2P card shuffling protocol to offer a more secure online poker experience for users.  The key features include:

uPort Identity management

Players register accounts through uPort, a self-sovereign identity application also developed by ConsenSys. This prevents users from multi-accounting, and ensures that Virtue Poker is only offering service to jurisdictions where online poker is legal. Virtue Poker will obtain an initial gaming license in Malta, and hopes to offer service to an international market.

Table Smart Contract

Each table contract represents a particular poker table, where results of individual hands are recorded as transactions governed by that contract. It defines the game details (such as stakes and the variant of poker being played), records user information about the seated players, and serves as an escrow for gameplay funds. When a player joins a table, the required buy-in (denominated in ETH or VPP) is transferred to the table contract. When a player leaves a table, their payout is transferred back to their local ETH wallet. This process expedites withdrawal speeds for players, as withdrawals need not be approved by Virtue Poker.

Transactions are submitted to the Ethereum blockchain when a player joins or leaves a table and at the end of each hand. As each hand is completed and funds move between players, the contract updates their balance. When a player leaves a table with funds, their balance is remitted to a local wallet. Given concerns about Ethereum’s scaling and recent network congestion issues, Virtue Poker aims to eliminate on-chain transaction confirmations for individual hands.

This feature aims to address the issue of player fund custody by transparently managing funds between a smart contract and a local user wallet. Virtue Poker does not have custody over player funds at any point.

Mental Poker Shuffling Protocol

Virtue Poker uses a peer-to-peer, cooperative card shuffling protocol termed Mental Poker to ensure game fairness. At a high level, Mental Poker ensures that the deck’s order is unreadable to any single player, while coordinating appropriate decryption during each hand. This addresses the lingering issue of game fairness and transparency in existing online sites, where players must trust the centralized host to run a fair game. The encryption process of Mental Poker, detailed below, runs in the background game client and requires no manual work from the players.

  • First, each player shuffles the deck and encrypts the ordering with their unique private key. The ordering of the 52 cards is now fixed for the remainder of the hand, and the layered encryption prevents any individual player from viewing the deck ordering without permission from all other players.
  • Next, each player decrypts their shuffle lock and re-encrypts the ordered deck with an index lock. At this stage, the value of each card is only shown if each player shares their index encryption key. This structure is essentially a multi-signature encryption system, where all parties signatures are required to decrypt the card values.
  • Each player shares their encryption keys corresponding to each other player’s respective hand, so that each may exclusively view their own hand. For community cards in variants such as Texas Hold’em, all players share encryption keys for the community cards designated by the deck indexing.

Justice System

The Justice System, in tandem with the Game Security Team, is designed to combat various forms of cheating and collusion. Justices are impartial, non-player referees that are assigned to individual game tables to verify and submit hand results to the Game Security team for further review and later IPFS for storage. In the case of a dispute between players as to the result of a particular hand, the assigned Justice acts as an initial arbiter. Justices are assigned to tables on a 1-1 basis.

To become a Justice, users stake the platform token, Virtue Player Points (VPP), to a smart contract. They receive a proportional stake of VPP in return, which is paid by players as part of the rake. Individual Justices run a local copy of the Justice software, which is designed to report hand results accurately. No manual work is required by the Justice, beyond running the software. Justices will rarely be able to flag suspected cheating based on a small number of hands and act only as an initial security layer.

Justices also hold partial deck encryption keys (from the Mental Poker protocol) from each player, to ensure that a hand can continue even if a player leaves the table or closes the web client in the middle of a hand. This is the ‘dropped player problem’ inherent to a P2P card shuffling protocol such as Mental Poker; each player’s private encryption key is needed to reveal cards during the hand.

Game Security Team

In the initial launch of Virtue Poker, a team of former professional poker players and data scientists will monitor game integrity and adjudicate instances of suspicious player behavior, including the use of bots or collusion to gain an unfair advantage in gameplay. This Game Security Team acts as a final integrity layer, and is managed and funded centrally by the Virtue Poker organization.

If suspicious activity is confirmed, the security team can penalize the user with a temporary or permanent ban. Virtue Poker would use uPort to enforce this ban; users could not simply create a new account. However, as will be discussed below, because player funds are withdrawn immediately to local cryptocurrency wallets, the Virtue Poker system has no method of reimbursing the cheated players.  This represents a major challenge for Virtue Poker, and, as will become clear, decentralized online poker more broadly.

This combination of design features aims to address each type of cheating identified above, and provide users with greater security and transparency assurances. Third party software, such as statistical tracking tools (HUDs) and seating scripts, will not be compatible with the game client. Virtue Poker will define the rake structure according to player feedback, but plans to offer lower rake than sites such as Pokerstars.

Token Economy Overview

An upcoming sale will offer the Virtue Player Point (VPP) token to crowdfund development and marketing efforts. The VPP token follows the ERC223 standard and has three primary functions within the Virtue Poker application:

  1. In-game Currency: Players can play poker using VPP or ETH as the in-game currency. Tables collect rake in the token being wagered, either VPP or ETH.
  2. Access to Special Tournaments: Virtue Poker plans to offer various tournaments and promotions that are only accessible to VPP holders.
  3. Staking Mechanism: Individual Justices must stake VPP to act as a working Justice. This stake incentivizes honesty in hand reporting, as Justices who are found to have reported false hand results have their tokens burned. Justices can be thought of as validator nodes on the Virtue Poker network. Each Justice is assigned to one poker table and earns VPP in proportion to their stake. This VPP is paid by players as a portion of the rake, with the remaining VPP accruing to Virtue Poker to fund product development and marketing costs. Virtue Poker has not yet defined the number of tokens that Justices must stake. This figure will be determined dynamically based on token price and the effective distribution of tokens to users.

Timeline & Project Status

Virtue Poker was conceived in May 2015 and has been in development since. Developments include a working testnet application that supports a six-player game at a rate of 70-80 hands per hour, and a demo video. The VPP tokens from this sale are non-transferable until mainnet launch in November 2018 and participants in this sale round have exclusive access to the alpha launch currently slated for late May. There is a potential second token sale, date TBD, with possible access to US investors as the regulatory atmosphere permits.

The published roadmap includes several key milestones and development areas. The alpha release will use a centralized data storage system, with plans to migrate to IPFS in the future. To draw users from other sites, Virtue Poker will implement a tokenized ‘rakeback’ program, where users are refunded a portion of their paid rake as access to special tournaments or direct VPP rewards. Virtue Poker will also develop multi-table tournament functionality, expanding upon initial offerings of cash games and single-table tournaments. Looking to 2019 and beyond, Virtue Poker aims to partner with third-party operators to develop site skins and game networks on top of their software.

Peers and Competitors

Virtue Poker’s competitive landscape can be viewed through a variety of lenses, given the plethora of blockchain-based gambling projects and the centralized incumbents of the online poker space.

Broadly, gambling applications are an established use case for blockchain technology. Early projects such as Satoshi Dice and Etheroll offer provably fair gambling through a transparent random number generator and minimal house edge, utilizing existing cryptocurrencies as payment rails. Transparent smart contracts ensure the safety of player funds, and the sites offer anonymous service and quick payouts. More recently, a variety of gambling-related projects completed token sales, offering tokens with a functional role in the platform. These include Funfair, DAO.Casino, and Sp8de.

While poker is certainly a form of gambling and nominally a member of the gambling sector, the importance of skill makes it fundamentally different than other forms of gambling. In blackjack, roulette, etc, the house has a guaranteed edge; in the long run, players will lose money. In poker, individual skill factors heavily in long-term results and luck manifests as short-term variance. Given this distinction, online poker sites are only indirect competitors to ‘pure’ gambling projects. The competitive landscape for Virtue Poker includes online poker sites in particular, both decentralized and centralized.

Virtue Poker’s primary competitors for the ‘decentralized online poker site’ use case are projects such as CoinPoker and Cash Poker Pro. Both projects are building sites based on Ethereum smart contracts, aiming to address the same issues of game fairness and custody of player funds. Examining the token model of these projects, however, reveals a core design issue. The tokens offered in the sale function primarily as site-specific payment mechanisms. While using cryptocurrency in general for player deposits and withdrawals is an attractive feature due to the complex regulatory and banking issues in the space, existing sites such as Nitrogen already have this feature but use major cryptocurrencies such as Bitcoin. Such major cryptocurrencies generally offer the advantages of a decentralized payment rail with broader adoption and less volatility than application-specific payment tokens.

More broadly, Virtue Poker’s true competitors are existing, centralized poker sites such as Pokerstars, Party Poker, and 888 Poker. While offering market-leading service to a diverse user base, these sites face the key issues in game integrity and player trust identified earlier. Pokerstars generated revenues of $877 million in 2017, and controls roughly 60% of global online poker traffic. As a result, costs are higher (in the form of rake) and player competition is generally considered more skilled than other sites. Pokerstar’s recent rake increases are unpopular with players.

To succeed within a competitive industry, Virtue Poker will likely attempt to attract and retain players by offering superior game security. Managing player funds through a trustless system of smart contracts offers a potential improvement over existing sites, both centralized and decentralized, given the long history of internal security breaches in online poker. Further, Virtue Poker may draw price-sensitive users from Pokerstars by offering a lower rake and more rewards. The Justice system and the staking function of the VPP token offer a fairly novel application of blockchain technology to provide game security, though this may not directly draw players to the platform. Effective marketing will be crucial to build brand awareness and seed an initial player pool. Finally, as will be explored in more detail below, Virtue Poker must navigate its inherent limitations compared to centralized sites in effectively policing in-game botting.

Team Description

The Virtue Poker team has extensive experience in software development, blockchain development, and the online poker industry. Virtue Poker was co-founded by senior developer Jim Berry, who has developed applications for Electronic Arts and NASA, and business development and marketing specialist Ryan Gittleson. The Chief Marketing Officer, Dan Goldman, led early marketing efforts for Pokerstars, the world’s largest online poker site. The project is advised by a group of top professional poker players, including Phil Ivey, Brian Rast, and Dan Coleman. Virtue Poker is part of ConsenSys, a blockchain venture studio founded by Ethereum co-founder Joseph Lubin.

Sale Terms

At time of writing, the first round of the VPP token sale is slated to begin April 25. The project is using a simple sale mechanism, distributing 100 million VPP at a single price to all buyers. The soft cap is 12,500 ETH and the hard cap is 25,000 ETH; if the soft cap is reached, the per token price is the amount raised divided by 100 million. The effective minimum price is 1 ETH = 8,000 VPP and the maximum price is 1 ETH = 4,000 VPP. There is no presale, private sale, or associated bonuses. The sale will end after 14 days, or once the hard cap is reached.

Sale participants are required to whitelist their Ethereum address, verify their identity through a KYC process, and complete a General Assessment Test demonstrating basic knowledge of the project. Participants from the US and China are not permitted. Tokens purchased in the initial sale will not be transferrable until the mainnet launch, expected in November 2018. Participating individuals will have exclusive access to the Virtue Poker alpha launching on May 22.

The total supply is 500 million VPP, 200 million of which is allocated to a combination of the team, founders, advisors, and various strategic partnerships. The team and founder allocations follow a 4 year lock-up schedule. A potential second sale round would offer an additional 100 million VPP, though no timeline has been set.  Virtue Poker hopes to include US participants at this stage, subject to regulatory approval.

Prospects and Challenges for Virtue Poker

Evaluating Virtue Poker’s prospects requires consideration of the role of the VPP token, the project’s feasibility as an online poker site with mainstream appeal, and the outlook for online poker more broadly. The VPP staking mechanism presents an application of blockchain technology that enables a distributed system of trust in a typically opaque system. Platform growth will be tied to VPP demand by users, particularly among Justices. Virtue Poker’s token sale mechanism, with no bonuses or discounts, will encourage adoption among a user base already comparatively familiar with cryptocurrency.

However, it is less clear that the greater online poker market has a bright future. The poker industry has evolved rapidly in the past 15 years, catalyzed by everyman Chris Moneymaker (actual name) winning $2.5 million in the 2003 World Series of Poker. Surrounding media coverage set off an online poker boom, reaching a peak in the late 2000s. However, much of this growth was centered in the United States, and enforcement of the Unlawful Internet Gambling Enforcement Act in 2011 shuttered the three largest online poker sites domestically. Since then, the market has moved overseas and consolidated to a few primary sites (ie, Pokerstars), and the game’s popularity online has arguably declined.

At the height of the online poker boom, top players could earn millions of dollars per year. This massive financial incentive, combined with burgeoning analytic software and computing methods, meant that thousands of bright minds poured resources into refining their strategy. As a result, the games became much more difficult as strategy evolved, and profit margins have diminished in recent years. In parallel, academic researchers developed more sophisticated bots using AI and other methods. In early 2017, a poker bot developed by Carnegie Mellon University soundly defeated a group of top professional players at 2-player Texas Hold’em. For the first time, the best bot beat the best humans at a common variant of poker. While this does not imply that poker is completely solved, given the variety of game formats and complexities, it does point to a landmark shift. The success of Google’s Go bot AlphaGo against top human players illustrates a similar trend.

These trends have a number of implications for Virtue Poker in particular, and the online poker space more broadly. In short, it means that online poker is unlikely to regain its market size from the pinnacle of the poker boom. Games are becoming increasingly difficult, and rake will consume an expanding portion of player profits. One conception of a sustainable ‘poker economy’ involves recreational players receiving entertainment value, professionals finding financial opportunity, and all requiring game fairness. Virtue Poker is taking steps to address issues of insider manipulation, player fund custody, and equitable rake structures, but it is uncertain if these innovations are sufficient in a troubled market.

Bots will continue to develop in complexity and availability, and sites will need to develop sophisticated methods to combat the bots and ensure game fairness across many areas. Indeed, competitor CoinPoker recently grappled with this issue. Here, Virtue Poker has a reasonable approach; utilizing the knowledge of ex-professional poker players and data science, although this is an approach centralized solutions can employ as well. However, Virtue Poker’s ability to punish cheating/botting is inherently hamstrung by allowing instant withdrawals of player funds. In the time it takes the Game Security team to identify the issue, the bot could win large amounts of ETH or VPP and withdraw it to local wallets, and Virtue Poker would not be able to do much more than ban the user from the site. The same bot software could be used again by other players. For all but the most flagrant cases, identifying a complex pattern of cheating requires analyzing thousands of hands; by the time the game security team does so, the funds will be gone. On existing poker sites, the centralization of fund custody allows the site to block or delay withdrawals for a suspected cheater and refund the affected players. Users would not get their funds back, unless Virtue Poker itself is willing to bear the cost.

In effect, players face a tradeoff between the legitimate enforcement abilities of a centralized service and the protection against illegitimate tampering codified by a blockchain-based system. This points to an understated truth in the blockchain industry: projects must consider the relevant tradeoffs in decentralizing some or all components of their operation. Certain aspects are better off centralized. The result, in this instance, is that while Virtue Poker may be effectively considered the soundest application of decentralized approaches to online poker, it remains unclear that its efforts will be sufficient either in addressing enough core problems within the online poker industry in general, or in solidifying its own prospects within a fundamentally challenged market.

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