Global Liquidity in Betting Markets
A peek at liquidity distribution in today’s betting markets
Smart contract platforms and decentralized apps building the DeFi layer run on Ethereum, a cryptocurrency accessible and usable by anyone with an internet connection. This means they can inherently create global liquidity pools, where money can be staked, traded or lent seamlessly between people from anywhere in the world.
Recently, there was debate in the Augur community as to whether this global pool is a realistic approach to liquidity, given that some of the products building on top of the prediction market protocol use a relayer mechanism that allows trades to be much faster and cheaper than on-chain, while on the other hand isolating the liquidity of their users, which is not shared on Augur’s main liquidity pool (on chain).
In this post, we’ll look at how the liquidity paradigm looks on fiat betting platforms and what model is a better long term approach for a decentralized platform like Augur.
Liquidity in fiat betting platforms
The fiat betting site most similar to Augur could be Betfair, as its main differential value is the offer of a p2p exchange where users can stake money against each other’s predictions, in a similar way to what happens in Augur markets (although the latter doesn’t impose a house fee).
In p2p betting systems, both Betfair and Augur, bets are only limited by the liquidity on the other side of an outcome. Yet, Betfair places an additional restriction on that liquidity: it is restricted to counterparties in your jurisdiction. As an example, let’s look at the recent Wimbledon tennis match between Rafa Nadal and Roger Federer.
As seen below, at the time of our screenshots (same for both), the market for the tennis match on Betfair UK had a volume of £339,614 ($421,916) bet by players, with an open liquidity of an extra £19,178 ($23,825). In the next image, we can see that the same match on Betfair Spain had a volume of €1,721 ($1,929), with open liquidity being just €1,136 ($1,274).
The difference in matched volumes is even bigger on the Tomic vs. Li match.
Some have argued that the global liquidity pool is a myth, providing as an example what happens in cryptocurrency markets, where pools like Bitmex act as a global settlement layer for many currency pairs.
There’s nothing wrong in that description of how liquidity is pooled in those centralized exchanges — it’s a different industry. The liquidity restrictions bettors all over the world are subject to when placing wagers are very limiting, and the value an open pool can provide here is huge.
The long term approach for Augur
The terms Open Finance, DeFi or Dapp are thrown around quite lightly. A decentralized application is simply a permissionless platform where anyone with an internet connection and who owns some cryptocurrency can enter into a financial contract with others.
Building a permissionless protocol is a task not short of challenges. In fact, with most national regulations still unclear in their positions about these systems, things will probably get more complex as the space grows. Therefore, DeFi protocols and the products building around them should optimize for base layer censorship resistance and global access from day 1, not restricting these protocols to liquidity pools somewhat siloed by certain products, geographies or (as tech improves) technical expertise.
In the case of Augur, global liquidity should be seen as another advantage in the long term value of decentralized prediction markets.
We’ve seen the liquidity disadvantages that fiat betting exchanges like Betfair have, and those differences apply to the countries where they operate. There’s a large part of the world they don’t even serve.
Smart contracts create open markets where anyone can participate. Far from a myth or a nice-to-have, a global liquidity pool is the best way in which liquidity can accrue for this decentralized betting platform to evolve from its current early stage to long term relevance.
Products connecting to Augur markets should optimize for the long run. The main liquidity pool triggers networks effects like we’re already seeing in Guesser’s first months of existence, and the costs associated with it should continue to decrease as technology improves.
