Wagerr: Initial investment review
This article is a follow up from my original piece on Wagerr.
In that article I laid out how the tokenomics (business model) of Wagerr works and showed how Wagerr could be valued, using projected betting volume.
Since then, Wagerr has been live for 6 months and utilising the data available on the blockchain we are able to gather real insights into how the Wagerr project is progressing. This culminated in a research report which we have just released.
This article accompanies the research report and provides some commentary around the research framework, valuation models and points that I was trying to make in that report.
If you are unfamiliar with Wagerr it is probably worth spending some time in their whitepaper or Telegram. If you want the TLDR the video below will help.
Investment Thematic
Gambling has been one of the key drivers of crypto utilisation to date, which laughable to some is not surprising to others. The internet progressed in much the same way. In 1994, it was the development of the encrypted communication protocols by Cryptologic, that unlocked the online gambling industry and helped spur the internet frenzy of the late 90's. Gambling websites were some of the first websites to offer a genuinely profitable online business model with these sites increasing in presence more than 10 fold from 1996 to 1997. Despite your ethical views on gambling as a business it is likely that a similar path is unfolding in the crypto space.
Investment Thesis
Understanding a businesses core value to its customers is always the number one starting point. By understanding this it helps us determine the factors that are critical to driving value into the business or in our case the protocol (coin).
Value Proposition
Wagerr is an incredibly interesting project because whilst creating a product that could be very disruptive to traditional sportsbooks it at the same time provides a solution to keep them competitive. Traditional sportsbooks will have the ability to leverage the blockchain as a means to de-risk from positions where their customers bets heavily favour one side and they want a means to offload some of that risk to another entity. i.e. place a bet on the same side using Wagerr. The picture below shows how this would work.
The question might be “Why would someone use a traditional sportsbook if it could interact directly with a blockchain?”.
At the end of the day there are pro’s and con’s for both, and both solutions will fill a demand by customers. Traditional sportsbooks for example, will almost always be able to offer more exotic betting functionality than what Wagerr could. i.e. parlay’s (multi’s), bonus bets, more niche markets etc. they also provide convenience in comparison to Wagerr.
On the flip side Wagerr would give customers complete privacy, enable them to interact with the blockchain from anywhere in the world and mitigate 3rd party risks (i.e. refusal of bets or default).
One of the main advantages however is the concept of value coupling, which makes Wagerr’s business model so attractive to both users and investors simultaneously. In my previous article I took some time to explain this, if you are hearing it for the first time a TLDR below.
Economic Moat
Whilst it’s probably laughable to argue that a start-up has an economic moat, the term coined by Warren Buffet provides a great framework to understand what gives Wagerr a competitive advantage over its competitors.
The most powerful of which is Wagerr’s ability to be its own bank, to literally print money to pay out bets. This creates a significant advantage over any traditional company as the capital required to be held for loses falls to zero. In other words Wagerr will have significantly better capital allocation than any traditional business in the same industry. This is a great example of how this technology will start to disrupt incumbent business models.
Further, as a decentralised project Wagerr inherently has the ability to scale globally instantly. All it requires is someone to download and run the software, this puts Wagerr in a distinct regulatory advantage over legacy businesses.
Investability
In traditional financial markets what we are buying is clear most of the time as the markets have developed over such a long period of time and people have become familiar with the various types of equity or debt people issue. However, in the Crypto market this can be blurred and therefore confusing.
The best example of this I can think of is the Sia.tech project (a cloud storage business utilising blockchain). Most “investors” were investing in Siacoin ($SC) in 2017, not realising that Sia funds sit within that network clipping a small amount of $SC on every contract. It’s not to say $SC can’t increase in value it’s more the fact that given the choice of the two most people that invested in $SC over the last year or so would likely choose not to now. (Research)….
Wagerr offers 3 different investments all which utilise the $WGR coin but provide investors different risk/reward appetites.
- Holding the $WGR coin
- ‘Staking’ 25,000 WGR for a Masternode (MN)
- ‘Staking’ 25,000 WGR for an Oracle Masternode’s (OMN)*
*2000 limit on OMN. OMN’s are not yet implemented and all MN holders currently receive all of the betting rewards.
In summary,
- Option 1 has little capital requirement but has a roof as the ‘rate of betting volume’ will slow causing the price to stabilise.
- Option 2 offers consistent returns but little upside with increased betting volume.
- Option 3 will have much higher costs but offers significant upside as betting volumes increase.
Tokenomics
Utility tokens
Before getting into this I want to first address the concept of utility tokens. There has been so much commentary around utility tokens during and particularly since the crypto crash of 2018. With many claiming the death of utility tokens as a concept and deeming them worthless.
The reality is utility tokens were never the problem, it was the ill designed economics of the token by the team which was deeming them worthless. With majority of the teams setting themselves up for failure prior to even starting in 2017. Read any whitepaper and it is blatantly clear the teams that have given no thought to their tokenomics (Red flag).
Interestingly though, what we are starting to see is how flexible these coins can be, take the recent changes of Binance coin ($BNB) where CZ is changing the rules of the game to successfully drive value into the $BNB coin.
There is still much more development to be had around utility token designs and we are only in the early stages. What excites me though is what I like to call “Hybrid tokens”, where due to the programmable nature of these digital assets businesses are able to offer real value to both investors and consumers at the same time.
Possibly, a way to describe these is “programmable equity”, where value can be captured only once you fulfil certain requirements i.e. providing certain services to the network/staking for a period of time etc. This is a distinct shift from traditional equity which often only requires capital as an entry requirement to capture value.
Ultimately, this is how I view Wagerr, it offers benefits to investors and customers simultaneously and offers essentially equity in the network if you meet certain requirements (Oracle Masternode requirements).
Valuation Model
Attacking Wagerr’s valuation I have had to make some assumptions and as more information comes to light I continue to adjust so consider this a point in time valuation.
The Key assumptions in this model are the ‘betting volume growth rates’ and the % of tokens that are not considered apart of floating supply (appropriately called ‘HODL factor’) i.e. people that are investors but don’t run a Masternode, people who maintain some amount of coins in their wallet, lost coins etc. etc. if you want to analyse the model you can see it here. Keep in mind it may change.
I have conservatively kept the HODL factor at 12.5% and below you can see the estimated growth rates starting at 100% in 2020 and tapering off to 5% perpetually.
Oracle Masternodes
If you are unsure what Oracle Masternodes are it is much easier to think of them as employees (a computer employee which you can operate). Their job is to payout bets to gamblers and they are rewarded with a clip of the winning bets.
Oracle Masternodes can really be likened to equity when you break it down. They receive an income stream that is based on the success of the company.
The cost of one share is 25,000 $WGR (or $2,560 USD at the time of writing) and there is only ever 2000 shares on issue. By projecting out the Oracle revenue streams and discounting back to todays value we are able to estimate the value of the Oracle Masternodes. I have chosen to use a discount rate of 40% which provides significant upside for those willing to bear the risks.
Below shows that the current price of Masternodes and it is still well below the discounted Enterprise value.
What this model fails to incorporate is the cost of running the oracle masternodes. This could be significant, although unknown, the cost could be up to $2,000 USD or more. Which would obviously dramatically change the cashflows.
However companies like allnodes.com are likely to provided services where the costs will be shared amongst oracles. (Again models will update with new information)
Even if a service like allnodes did not offer shared oracle costs or did not exist it is likely that the amount of Oracle Masternodes would adjust. What I mean here is that the high cost could cause very few people to run an Oracle and Wagerrr might end up with a situation where only 500 Oracle Masternodes operate but they would now share in a greater proportion of rewards. As costs come down or rewards go up, more oracles will join the network until the 2000 limit is hit.
Yet the question remains; will Wagerr actually hit the betting volume required?
Blockchain Analysis
The biggest benefit of blockchain is the transparency of the data that it enables us to capture. With the blockchain I am able to on a daily basis query things like how many sales Wagerr has (the betting volume) or how much inventory they have on hand (development fee fund). In comparison to traditional companies this is a giant leap forward. Having pulled the data to date, below is some of the analysis which helps gives us insights into the betting volume question.
From the above pictures we can see that the Volume of Wagerr has been increasing and the majority of that increase can be attributed to an increase of events to bet on. By using a pricing feed we can convert that betting volume to USD to see if that gives any other insights.
What we can see is that betting volume of USD has been growing at a slower rate but as the $WGR price increases the USD volume looks to be rising more rapidly, which may suggest existing users are betting in WGR units not USD. Further it is quite clear that there is a correlation between the number of betting events and the amount of $WGR and $USD gambled per week.
Whats even more fascinating is that if we compare the WGR betting volume side by side to the USD betting volume we are able to see the concept of value coupling in action.
Getting back to the question; for Wagerr to reach its first year price target of $25 million USD it would need to be taking $500k USD worth of bets per week. We are just now starting to hit those levels and we are on an upward trajectory.
But what are the drivers that will cause us to meet those targets?
Value Drivers
Given the correlation between events and amount bet it is clear that if we can increase the events then we can increase the betting volume. To date all betting has been achieved via a QT wallet or what can be more appropriately described as a beta product (quite an achievement), this has meant that betting events have been significantly limited (maximum 150 a week). In the next few weeks Wagerr will release a HTML (Electron) wallet which will significantly increase the amount of events that can be fed through the wallet as well as create a much more seamless user experience to attract more users.
It’s estimated that the number of betting events will increase at least 3x making the case for Wagerr hitting our betting targets quite strong.
Risks
Given the above, it’s imperative that we now turn to the risks. In any investing there are risks involved and by shining light onto them we can understand them, mitigate them, monitor them and generally be comfortable with accepting them or not.
Technology
The biggest risk is the technology itself. Blockchain is still relatively new and the more functionality you add to the original bitcoin codebase the more risk that you have to accept. Bitcoin itself could still very well hold vulnerabilities that could be exploited.
On the flip side open source software means that many eyes can monitor the code and as we progress these protocols become stronger. And in Wagerr’s case they are able to leverage off the expertise of PIVX developers who’s codebase Wagerr forked and continue to maintain.
Just recently there has been an example of this with vulnerabilities found with zerocoin. Wagerr developers have been both a contributor to upstream protocols as well as a beneficiary.
Sustainability
One issue with many projects is their inability to plan for a sustainable future. A funding mechanism that will ensure longevity and not be influenced by donations or sponsorship.
Wagerr operates a self-governing and self-funding budget model that enables the network to pay individuals and businesses to perform work that adds value to the network. There is a risk that Wagerr fails before reaching a point where the network is self-funding.
Thanks again to the Block explorer we are able to see this very transparently. The below graph is essentially the Wagerr bank account (once initial investor funds are depleted) and it is a huge step forward in how businesses will function in the future.
The current fund is relatively small but $WGR price increases have a compounding effect on the fund. I.e. as prices are low the development fund will earn more Wagerr as more WGR is bet and as prices rise existing funds will be worth more.
Our projections suggest that Wagerr will become self-funding at around 200–300 million USD betting volume per year.
Competitors
Wagerr faces competition from both the traditional bookmakers as well as the blockchain based projects.
In general, Wagerr offers solutions that traditional sportsbooks cannot and Wagerr will fill that need. In time Wagerr may have to compete head on, which will no doubt be a tough ask considering their capital, marketshare and expertise in the gambling industry. One advantage Wagerr has here is that for traditional businesses it would be incredibly difficult to replicate the Wagerr business model without destroying their own enterprise value.
Blockchain businesses pose a bigger threat as the business model could be replicated. To date the majority of gambling projects have not innovated the business model and have more or less created a worse user experience for customers by introducing a token merely as a payment mechanism. Two companies though are worth mentioning.
Peer plays (Market cap 4 million)
Peerplays is an example of a real decentralised project, and although it has a smaller market cap then Wagerr, at this point, that is largely irrelevant given the immaturity of the market. Peerplays still captures all of the benefits that a decentralised project does.
Bookie a project built on top of the Peerplay platform is more likely to be a Direct competitor. The main point of difference being that bookie is a betting exchange and that it will allow users to use BTC as a payment token with some value capture being redirected to Peerplay and likely exchange fees providing value for Bookie.
There are bound to be many successful projects and it is important to keep an eye on them. Peerplays might be one of the only projects offering real competition at the moment.
Augur (Market cap 211 million)
Augur is the much hyped Ethereum prediction market. Augur’s prediction market expands much more broadly than just sports betting but it does allow sporting markets to be created by users.
Augur has support from a very large Ethereum community, however it’s user experience and questionable markets has made for a spectacularly low adoption rate. Projects like Veil.co will help solve this problem but with a complex result resolution process to match I feel much more development is needed by Augur.
As the above picture suggests Augur is not blowing it out of the water and its $211 million dollar valuation is simply puzzling. To put this in perspective if we valued these companies based off the volume over a 7 day period, Wagerr would be valued at approximately 514 million, 27x its current valuation. Nevertheless the potential for a prediction market is incredibly large and the ethereum community means it is always one to monitor.
Liquidity
Finally, Liquidity is an important piece of the puzzle for any utility token and particularly for Wagerr. Currently, the order books on exchanges remain incredibly thin, which could trap potential winners into remaining in the currency for longer than they wish or forcing them to take significant haircuts on their earnings.
Fortunately there are many ways that this problem can be addressed;
- More users
- More on ramps and off ramps (Exchanges)
- Market Makers
- Having direct Fiat/WGR markets
- Increased prices, increasing liquidity
I doubt that this will be a concern at maturity as the Wagerr project is an exchanges dream. Gamblers will need to continually cash in or cash out coins. I won’t attempt to add further to this as there are plenty of discussion regarding this within the Wagerr Telegram.
Conclusion
In Summary, Wagerr offers a real example of how this technology will start to revolutionise business models and industries. It will offer customers new services that have previously been unattainable and investors new markets to explore.
Utility tokens in particular offer a significant threat to traditional business models but have yet to show any impact because of the poorly thought out designs. These tokens can be valued but they require new models and a new way of thinking about value capture.
Wagerr’s growing betting volume is an impressive feat considering the projects limitations. And with short term catalysts for continued growth, the market is fundamentally mis-pricing this coin.
Finally, If you have made it to the end of this congratulations and thank you for reading, you are probably more than likely an existing Wagerr holder in which case I believe you will be rewarded in time. Feel free to reach out if you want to discuss or even critic the above.
