



The rise of smart contracts and applications powered by the Ethereum blockchain have yielded some curious creations. These include decentralized exchanges, online stores, prediction markets and of course CryptoKitties, a marketplace for digital cats.





Smart contracts also enable gambling. A prime example is the game Fomo3D, which some view as genius and others see as an elaborate Ponzi scheme.





But Fomo3D is not a Ponzi. It's not even a scam, despite its creators best efforts to brand it as such. A scam would entail some form of fraud or deception. Assuming there are no bugs in the smart contract code, Fomo3D is actually the opposite of a scam. It is completely transparent, carefully designed and accessible to everyone.





At its core, Fomo3D is just a gambling game with a rake of 2%, or the amount of money the platform charges for operating the game. Compared with most casino poker rooms, 2% is actually very reasonable. The pertinent characteristics of the game can be summarized as follows. It's a quasi-lottery where participants can purchase one or more "keys." If you are the last person to purchase a key before the timer counts down to zero, you win just shy of half the “active pot,” which at the time of writing contains over 21,700 Ether or ETH (about US$6.9 million).





At less than US$2 (according to current conversion rates), keys are cheap. Every time somebody purchases a new key, 30 seconds are added to the timer. This creates the potential for a massive ETH drain on the ecosystem if the game goes on long enough. If you delve deeper into the game, you find that only a portion of the ETH from a new key purchase enters the pot. The rest is actually divided between existing key holders, creating some interesting pyramidal dynamics, which also explains why some believe it’s a Ponzi scheme.





But if only 48% of the active pot goes to the last key holder, where does the other 52% go? 2% goes to the “community pot” (the rake that I mentioned earlier), while 50% is distributed among the players and funds a balance to be carried over to the next round for the next game to start automatically with the same parameters. Yes, you heard right. If this game does in fact end with a winner before consuming a vast amount of ETH, it will just restart and continue to pose an eventual threat to the network.





At first glance, it looked like a game structured in this manner could potentially take down the entire Ethereum blockchain. At the peak of the CryptoKitties craze, for instance, unprocessed transactions on the Ethereum network skyrocketed, clogging the whole network. But closer inspection of Fomo3D’s data reveals that the game may in fact be more benign due to relatively low participation and the fact the keys remain quite cheap (although they are expected to go up over time).





While games like CryptoKitties crowd out the computational bandwidth of the blockchain, Fomo3D and other pyramidal gambling schemes represent more of a systemic risk present in systems that operate under decentralized governance. By catering to the irrationality of the crowd, they have the potential to snowball into a massive drain of Ether, which would hinder liquidity, fracture proportional ownership of tokens, and possibly render users disaffected.











But it turns out that much of the fear around Fomo3D’s impact on the Ethereum blockchain is overstated. In the chart above, the purple line shows the number of active addresses involved in the Fomo3D games every day, and the blue line indicates the number of ETH transferred to the main contract address: 0xa62142888aba8370742be823c1782d17a0389da1.





We can see there is a peak on July 21, when around 69,629 ETH were transferred to participate the game and the number of active addresses reached 9,894. (At the time this graph was drawn, 97,687 ETH in total were transferred to this game.) Afterwards, Fomo3D proved a lot less active than one might fear. Players got smarter quickly, and new entrants only appeared to be enticed to make their challenges for the pot when the timer was sufficiently close to zero.





It's also worth looking at the amount of ETH earnings that are withdrawn every day, which is shown in the figure below. Peak withdrawals occurred on the same day, July 21 -- more evidence that the game reached its climax on that day before dropping dramatically afterward.















These graphs challenge the notion that games run on Ethereum smart contracts continuously attract more and more users, potentially leading to a drainage of ETH. As we saw with CryptoKitties, another popular Ethereum-based game, users were drawn to its newness but most of them dropped off after some period of time.









So how will this story end? Fomo3d is certainly an intriguing space to watch. Similar gambling games, such as ‘PoWH3D’, have also popped up. We know there's a limited supply of ETH so games like Fomo3D can't go on indefinitely, but if the drain becomes sufficiently large, we may see symptoms that undermine confidence in the network. Reduced effective supply would mean liquidity and volatility are impacted. There's a risk of network spamming attacks by existing pot leaders to hinder competing pot entrants. A large bounty may also attract insidious attacks on the smart contract itself. Finally, taking things to extremes, there's also the potential for a Pyrrhic victory, whereby somebody successfully takes down a gigantic pot of ETH, but by the time they succeed, the detriment to the network and its valuation is so severe that the ETH is essentially worthless.







Given that activity has slowed and participants have become smarter and more selective about when and how much they risk, it doesn’t appear that the ongoing rate of ETH drain is anywhere near large enough to pose a significant threat to the stability of the network. That said, the allure for programmers to create clever games that target human irrationality will remain strong. If nothing else, Fomo3d is a good reminder of the perverse incentives that can emerge in decentralized systems.





Scott Weatherill is chief dealer at B2C2 Japan and a former trader at Goldman Sachs.









