Dec 7, 2021 - 1 day read

The Future of Sports Betting

Andrew Young 8.6k

Via Medium

The twin tailwinds of newly opened markets (i.e. the US) combined with the acceleration in the shift towards online betting thanks to Covid-19, has led to an unprecedented boom in online bookmakers…

Tokenized community ownership is an extinction level event hurtling towards traditional bookmakers

It was the best of times

The online sports betting industry is on fire right now.

The twin tailwinds of newly opened markets (i.e. the US) combined with the acceleration in the shift towards online betting thanks to Covid-19, has led to an unprecedented boom in online bookmakers.

For example, DraftKings’ stock is up more than 400% since it’s public listing via a reverse merger last April:

Hell of a time to own a sports betting company right now

Some public European bookmakers have had to re-adjust somewhat given their exposure to land-based operations and a smattering of new laws that hamper profitability.

For the most part though, it’s never been better time to be a bookmaker:

Global sports betting revenue has been increasing at a 9.5% CAGR for the last ten years (Source: GBGC)

The tailwinds that have propelled sports betting companies to their incredible growth are expected to continue with the entire industry expected to continue growing at double digit rates for the next 5–10 years.

Bookmaking 101

The business model of bookmakers is pretty simple: they offer odds on different sports and political events to bettors and take a small cut of the action in the form of a “vig”.

This vig is typically not an outright charge; instead it’s built into the odds they offer. This means they take their cut by charging a little more for bets on the favorite and paying less than they should on bets placed on the underdog.

For example, the odds on an NBA game could be:

  • Toronto -140 (bet $140 to win $100)
  • New York +120 (bet $100 to win $120)

In the above scenario, you’d have to bet $140 on Toronto to win $100, as they are the favorite. Similarly, if you bet on New York and they win, you’ll get back $120 on your $100 bet. If one person bets $140 on Toronto, and another bets $100 on New York, the bookmaker would have a guaranteed profit of $20 irregardless of the outcome. Bookmaking 101.

The Problem with Bookmakers

Contrary to popular opinion though, the bookmaking business model isn’t all about perfectly balancing the book and taking a spread as a middleman.

Each bet is a zero-sum wager against the bookmaker.

This means that bookmakers only make money, if on net, their users lose… a lot.

Bookmakers do provide a service and therefore deserve revenue for it. The problem is that bookmakers are far too incentivized to push the limit of what most bettors would consider is acceptable behavior. As a for-profit business, with an inherently zero-sum relationship with it’s users, bookmakers go above and beyond to make sure their users lose.

For the uninitiated, here is a quick laundry list of things bookmakers do to make sure you lose:

  • 🔐 No Transparency: There is essentially zero market data available on bookmaker sites to analyze. Unlike traditional financial markets, bookmakers have no obligation to release betting volumes, order flow, or liquidity. Sports betting is essentially a black box.
  • 🚫 Ban Winners: Bookmakers are notorious for banning winning bettors from accessing their platform. Bet365 allegedly has an entire team and software stack devoted to identifying winners and banning them. There is no other financial market in the world that actively bans profitable participants.
  • 💰 High Cost: Bookmakers absolutely juice their users, with the industry standard being transaction costs of 5–7% of the bet. Because they control the listed odds as the sole odds provider, users either have to accept them or exit.

Given these facts, why won’t bettors leave? While bookmakers are notorious for making it difficult, slow, and expensive for users to withdraw their money, there must be another reason users bear these costs?

Surely bettors would flock to an upstart that solves these challenges and offers a true sports betting free-market? This was the core thesis of centralized betting exchanges.

The False Promise of Centralized Betting Exchanges

Traditional for-profit betting exchanges can’t avoid the incentive to turn extractive. Source

Over 20 years ago, centralized betting exchanges like Betfair were started in order to bank on these downsides in an attempt to capture market share. By offering a peer-to-peer market, Betfair and it’s competitors provided better transparency, lower costs, and didn’t ban winners.

However, this proved short-lived.

While centrallized betting exchanges are a leg up from sports books; historically, over time, all centralized betting exchanges have eventually degraded.

This is because centralized exchanges are still fundamentally for-profit companies run by a single, extractive operator. The for-profit company in charge of the exchange has too much of an incentive to eventually raise fees, block certain users, and begin transitioning themselves into a (more profitable) bookmaker. Additionally, the relatively complex UX of exchanges and their inability to offer popular bet types (like Parlays) hurts their ability to capture meaningful market share.

We believe this inherent conflict of interest is why traditional betting exchanges, while promising, have failed to fundametally disrupt the traditional bookmaking model.

Centralized betting exchanges have never captured much more than 10% of the total online betting market share, and for the most part, are relegated to relative the edges of the market.

Introducing Cryptonetworks

Crypto Tokens: A Breakthrough in Open Network Design

The rise of Ethereum and other blockchain-based smart contract platforms has enabled the creation of cryptonetworks.

Jesse Walden, the head of crypto VC firm Variant, coined the term:

Cryptonetworks are information networks based on open source code, shared state, automated “smart contracts”, and 24/7 international markets... These networks that treat their users equitably may be easier and cheaper to grow as early participants are incentivized to drive network effects, because they can participate in the value they help create

The key feature of cryptonetworks is that they are owned and operated by their members. This is all made possible by the fact that ownership and control can be encoded into a crypto token. Crypto tokens make it possible for humans to transfer digital value the same way we transfer digital information: transparently, instantaneously, and at very low cost.

This ability to cheaply encode and transfer ownership makes it economically feasible for digital platforms to be owned and operated by their communities.

The Rise of Community-Owned Betting Platforms

The New York Stock Exchange was originally started as a member-owned exchange

There is no industry more ripe to be disrupted by a community-first model than sports betting.

Traditional bookmakers, for the most part, systematically exploit their users. Community-owned betting platforms, on the other hand, share the economics of the platform directly with their users.

Bookmakers are controlled and operated by for-profit entities that aim to maximize value extraction from their users. Community-owned betting platforms are not only owned by their users, but also governed and operated by them. Users get to programmatically vote on the direction, fees, strategy, budget, etc, of the platform themselves.

Bookmakers entice bettors with short-term deposit bonuses in a bid to keep them engaged. Community-owned betting platforms give their users tokens in the network itself. These tokens typically vest over time, in order to align the long-term interests of user and platform.

Bookmakers control every facet of the technology stack powering the product. Community-owned betting platforms run on open-source technology, using the shared state of a blockchain, and use verifiably open and transparent APIs that outside developers can have faith will never be gated from them.

Bookmakers spend millions of dollars on targeted ads in a bid to generate awareness for their product. Community-owned betting platforms grow primarily through organic, word-of-mouth marketing. Community members evangelize the product because they own it.

There are so many reasons that community-owned betting platforms are better for users that it’s impossible to list them all. On almost every dimension across major stakeholders (bettors, market makers, developers, etc.), community-owned betting platforms are vastly superior.

Traditional Bookmakers Cannot Adapt

Community ownership is a disruptive innovation making it highly unlikely incumbents will survive it

The biggest advantages of the community-owned model are the same reasons that the traditional for-profit entities will not be able to adapt.

Community-owned betting platforms give their members the best odds and are run on open-source technology.

Traditional incumbents will never embrace a model as these three main features involve willingly giving up the ownership, profit margin, and intellectual property of the businesses they created.

Any for-profit entity with millions of dollars in revenue will find that to be a very challenging undertaking.

For this reason, we believe community-owned betting platforms are an extinction level event rocketing towards traditional bookmakers that cannot, nor will not, adapt.

The SportX Thesis

The SX token creates alignment within the SportX and SX Network ecosystem

This vision of community ownership is the core thesis underpinning SportX.

SportX is the world’s first community-owned sports betting platform.

It is a non-custodial exchange that gives users unparralled transparency, security, and fairness. It’s built-on the SX Protocol, which is a fully open-source smart contract software. It gives unprecendented transparency into the minute-by-minute operations of the platform to the public. We’re also in the process of building out the SX Network blockchain, which is the world’s first public blockchain designed for sports betting applications.

SX Network is owned by its users; every time you place a bet on SportX or an app using SX Protocol, you get SX tokens. These tokens have complete control of both the SX Blockchain and SX Protocol. All revenue generated by SportX or the SX Protocol is diverted to the SX Community Fund, which is controlled entirely by the SX tokens. There are no value leaks; revenue generated on SX goes to SX tokens, which are widely held by the community.

Numerous studies have shown that the armies of democratic governments fight better than the armies of autocratic ones (source). Soldiers fight harder, take more initiative, and are better organized. Enfranchisement is a competitive advantage on the battlefield. SportX is simply making the bet that enfranchising bettors will accomplish the same thing in the sports betting world. Enfranchising bettors is an insurmountable competitive advantage.

Enfranchising bettors is an insurmountable competitive advantage. This is the core SportX thesis.

Just as the extinction of dinosaurs paved the way for large mammals to take over the earth, the demise of traditional bookmakers will pave the way for fairer, more trustworthy, community-owned betting platforms.

The end result will be hugely beneficial for bettors everywhere.

We’re excited to be leading the charge.

About SX Network

SX Network is the first public blockchain to combine a smart contract platform with an on-chain community treasury and a native prediction market protocol. SX Network is a stand-alone smart contract blockchain built on the Polygon SDK. It is designed from the ground up for blockchain application developers with EVM-compatibility, low-cost transactions, and a PoS-based consensus model.

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