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Next Level Sports Markets (Part 2)

I recently wrote about how bringing sports onto the blockchain is enabling new fan engagement models and investment assets. For this post, I will explore how sports betting could take advantage of decentralized computing to grow the market with new product offerings and reach new customers.

Sports betting is centralized and siloed where each bookmaker (be it an institution or an individual) compiles its own odds. Like most markets, bookmakers rely on liquidity and volume to be profitable. Moving onto a scalable, interoperable platform such as Avalanche provides greater liquidity for bookmakers and more choice for bettors.

Sports Gambling is Big Money and Big Risk

Globally, the sports betting industry is estimated to total $150 billion, including informal (i.e. illegal or unregulated) bookmaking operations. The regulated market in the U.S. is small but growing rapidly. In 2019, US gaming operators saw Americans wager over $13 billion on sports — legal in only 14 states! Many more states are expected to legalize sports betting to grow tax revenues in the coming years. Consumer surveys indicate 91.5 million U.S. residents are interested, seeking more information, or already wagering on sports -much of this is pent-up demand awaiting legalization.

Currently, casino-run sportsbooks take on substantial risk to be able to offer gambling products. Large cash reserves are required to offer legal gambling. These reserves must cover the value of any prizes owed to patrons, the value to pay the rewards offered on display, the amount required to pay out winnings due over a 12-month schedule, and more. This steep reserve requirement encourages casinos to be very conservative with risk, resulting in an insular, siloed system of record-keeping that is steeped in tradition and secrecy. Blockchain can help build a transparent, interoperable system that allows casinos (and all bookmakers) to optimize odds while expanding wager offerings available to bettors.

Disrupting Centralized Sportsbooks

This model of siloed centralization is one that’s been disrupted again and again as the internet changed the world (e.g. equities markets, Amazon, Expedia, Uber, Bitcoin, Ethereum, etc.). Increased connectivity led to more sophisticated price discovery in equities markets, making arbitrage fast and automated. There are still opportunities to refine and improve capital markets (especially around due diligence and transparency on balance sheets), but the liquidity and certainty around price discovery are part of the reasons why public markets activity has boomed in the past 40 years.

Sportsbooks will very likely need to evolve to a similar model. Distributed systems are coming to disintermediate every marketplace-based business. As argued in my NASDAQ article, centralized institutions will be “steadily phased-out of a new market structure centered around velocity, efficient use of capital, and resiliency against security breaches at single points of failure. Characteristics that equally benefit the institutions and monetary authorities, as it does their clients and constituents.”

The Benefits of a Bigger Pie

For sports betting, imagine that sportsbooks are part of a subnet on Avalanche. This network securely holds financial and proprietary odds-making information, while allowing a discovery portal to find odds discrepancies across books. If the U.S. federal government one day simplifies state-by-state regulations, this can open up far larger pools of liquidity for casinos as they cross state lines. This would increase competition, make a fairer marketplace for the end-user, attract new customers, and enable smaller sportsbooks to offer more products.

Why would this be useful? This could increase the number of players while allowing them to better hedge risk and grow revenues with increased volume. For example, a smaller sportsbook often cannot offer odds on player props (bets on individual player performances or discrete events that happen in a game). An interconnected network would easily allow a larger sportsbook to send out player props as an API in a partnership model. The large sportsbook gets additional distribution into niche markets, and the niche sportsbook gets new product offerings to make their service more enticing.

When liquidity and volume grow, financial systems become more robust. A trusted subnet of interoperable but independent casinos could create other products with increased access to capital. One example is the creation of a large, shared prize pool. If a system puts more cash together, then prize pools can be combined for marketing events that draw in more players. The draw of a $1,000,000 cash prize is far more effective than a hundred $10,000 prizes across multiple platforms. This is a marketing model that the interstate Powerball uses to generate greater interest in other offerings-one massive prize to generate interest for niche services. A secured subnet that connects dozens or hundreds of bookmakers of all sizes dramatically increases the amount of money moving in the system and customers will have a larger variety of wagers that they can make.

Taking sports betting to the blockchain will create stable fund flow in the system. Derivatives and other products from the financial world can then be applied to sports wagers. Assuming that compliance hurdles are not absolute nonstarters, consider how an insurance derivatives market on sports wagers would look — not a bet against a team or athlete, but rather an option against the gain/loss of a sportsbook in creating and paying out a particular bet. This opens markets to more sophisticated risk-adjusted returns and hedging strategies, like credit default swaps.

For example, if a match has an extremely unlikely outcome with a 1000:1 payout, the sportsbook could create a derivative against the 1000:1 outcome. The sportsbook sells the derivative in case of a catastrophic loss, paying a smaller premium to hedge this unlikely event. This gives the sportsbook more predictable returns on a given bet, and if linked into a larger subnet, allows competing sportsbooks to take insurance derivative positions against each other’s odds to improve returns. This lets sportsbooks take riskier positions when there is demand, making betting more desirable for more players.

The same basic structure could be applied to other sports-based gaming markets, such as fantasy sports. Fantasy sports will become an even higher growth industry in the coming years as sports open back up. Using a universal settlement system and tokenized derivatives of fantasy sports outcomes, hedging or risk optimization could open layers of fantasy game mechanics, creating new revenue streams for fantasy sports providers.

Innovating at the Speed of Markets

At Ava Labs, we are building the platform that enables interoperable, secure, and incredibly fast new markets. What Shopify did for e-commerce, Avalanche will do for financial marketplaces by creating a consistent, functional engineering layer to enable complex markets with network effects.

This robust, incredibly fast, and secure system to process and settle transactions will open up alternative markets with unprecedented capabilities. Faster markets can raise the stakes for professional traders, but also lower the barrier to entry for many new potential customers by creating a derivatives vertical alongside the core product. People can build in their own programming logic while relying on the fundamental consensus layer for truth. Trades can happen across asset classes, blockchains, decentralized markets, or whatever you build.

Disintermediate Everything — or — Redefine What’s Possible

Avalanche is creating a new paradigm of thinking about markets with practically instant finality. Speed and security across relevant markets combined with enterprise-level engineering will open incredible opportunities for visionary builders. All of this introduces sophisticated financial markets to new industries. Layers of financial and economic modeling can be applied to probabilistic events, driving added value creation that traditional financial markets have enjoyed for decades.

Innovation is the core of how we build at Ava Labs. We are creating a new world full of innovative products, markets, and opportunities. It is critical for the world to grow and advance in how we innovate upon existing products.

We are not building the next sports wagering derivatives market, but we are building the technology that lets ideas like this become reality — the technology for you to build without limits.

If you want to learn more about how Avalanche is enabling new decentralized applications, feel free to reach out.

Originally published at https://johnwu.finance on July 14, 2020.

About Avalanche:

Avalanche is an open-source platform for launching decentralized finance applications and enterprise blockchain deployments in one interoperable, highly scalable ecosystem. Developers who build on Avalanche can easily create powerful, reliable, and secure applications and custom blockchain networks with complex rulesets or build on existing private or public subnets.

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Avalanche is the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality, and has the most validators securing its activity of any proof-of-stake protocol.

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John Wu

John Wu

President of AVA Labs, @Cornell and @HarvardHBS alum. Bridging blockchain and finance, one market at a time.

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