Do decentralized betting platforms represent a bit of rationality in the ICO market?
(This note was distributed to readers of our Rad.Daily newsletter. You can sign up here to become a reader. If you want to see the future, you just have to look at the bets entrepreneurs are making.)
In today’s Rad.Daily, we continue that exploration by turning to what we would call Decentralized Prediction and Betting platforms. These platforms may better be described as the blockchain response to traditional gaming and bookmaking businesses. Vegas and Macau meet Satoshi and cryptocurrency.
Our report covers seven platforms that have completed initial coin offerings (ICOs), including Gnosis, Augur, Bodhi, DAOCasino, FunFair, Peerplays and Wagerr. $85m of cumulative proceeds have been raised across the seven ICOs, including $26m raised as part of Peerplays’ ICO — the largest ICO to-date in the sector.
As of 3-Oct-2017, the combined market capitalization of the 6 tokens that are actively traded (Bodhi is not currently traded) is ~$490m.
When investigating these new applications and platforms, we ask a few main questions to think about the value of each platform generally and of the underlying tokens more specifically. By our initial analysis, and we echo the same caveat here that we shared when considering the Decentralized File Storage sector (i.e. we could be very wrong, and this is not advice):
- The size of the global gaming market, including the online component thereof, is massive.
- The base logic supporting a decentralized approach to bookmaking and gambling is plausible.
- As a result of (1) and (2), when you apply the quantity theory of money framework that we’ve used to explore cryptocurrency valuation…
- You arrive, depending heavily on certain key assumptions, at a fundamentally-derived range of values that may even exceed current trading levels set by the market for tokens in this sector.
Gambling is a huge market. Probably even bigger than you think.
It turns out that people love to bet and gamble. And increasingly they love to do it online. Analysts expect the global gambling market to expand at a ~6% CAGR through 2022 to over $600b. And that represents global revenues earned legally by casinos, bookmakers and other businesses that facilitate gaming and betting. In other words, the amount wagered annually across casino games, sports bets, poker, etc. is substantially more, as those in the business of facilitating gambling only “win” at a certain rate and earn a percentage of all wagers. (This number for all gambling could be something more like +$5 trillion, given again that $600b represents the casino win rate on an order of magnitude larger amount of actual wagering.)
A casino’s win rate itself is different depending on the mix of games being played. Given 2016 results at Nevada-based casinos, the average “win rate” across various betting games and sports books (assuming even distribution of wagering across games) would be 10.3%. This is made up of a 6.65% win rate for slot machines, 16.95% win rate for casino games, and 7.31% win rate for sports betting. At that rate, and assuming the online segment of the gaming market represents 10% of the total market (or ~$30–40b), we estimate total wagers made online in 2016 at $300–400b.
At a high level, decentralization of odds setting authority makes sense.
The conditions in which a decentralized, blockchain-based application or platform achieves critical mass remain… well, unproven. But certain components of betting may lend themselves to a decentralized approach:
- Odds makers are a classic case study in gate keeping and centralization — any blockchain’s enemies. Odds makers set the rules in order to lock in their position and fees. The house always wins eventually, because that’s how the system is designed. There does not need to be a house to set the odds though. A book can be made computationally and odds set through some combination of (a) mathematics and (b) the crowd’s collective intelligence…
- …so long as trust can be established in the market making system. As blockchains allow for the distribution and decentralization of otherwise centralized authority (and for other reasons), they are effectively trustless. Trust is placed in the protocol and the computational power that secures it. In a gaming context, as the ability to set odds is decentralized, the house’s take should be subject to more, and more significant, competition. Therefore, players should pay less for the privilege of playing over time.
- And then there’s the fact that blockchains are mostly anonymous. While crypto-betting remains in a regulatory grey area, it may be an outlet for both regulated and unregulated gaming.
Another way to think about this is to consider what would be required for a new online gaming startup to achieve significant traction. It would have to manage regulatory hurdles, establish trust with customers as a fair place to make wagers, and lastly develop the capability to set odds that are competitive (but still profitable) so as to win customer attention away from incumbents. A decentralized approach has benefits across each of those requirements.
So, again, our view is that the case can at least be made for a blockchain-based approach in this category.
Consider Gnosis, for example.
Gnosis completed its ICO in April 2017. As of October 3, you could buy a Gnosis token for $110 (down from an all time high of ~$350 in late June). By applying the quantity theory of money framework to that price (which we describe in more detail in our first note in this series), the implication — again, depending on a set of assumptions sensitized below — is that the dollar volume of bets wagered through a decentralized betting platform and using crypto-tokens could be $16–275b. Yes, a huge range. But instructive in context.
For the sake of sensitizing a set of assumptions, we use the current Gnosis price of $110 and apply a range of inputs to both (a) the share of all decentralized betting that Gnosis, as our test case, could achieve over time if it becomes the leader in what we assume will be a Power Law-driven market, and (b) the Velocity at which Gnosis tokens will be usable by holders.
Above we estimated that total annual wagering through online betting and gaming platforms is $300–400b currently and growing at >7% CAGR through 2022. That is somewhere between 9% — 2,400% greater than the $16–275b range implied by current Gnosis prices.
If you are of the point of view then that a decentralized approach has benefits over existing betting and gaming platforms, the winning, blockchain-based betting platform achieving ~5% market penetration (at the low end of our range) may seem conservative. The high end of the range above implied from Gnosis’ current trading price, meanwhile, would actually suggest that current investors are underwriting a case where decentralized betting grows over time into the predominant way that people bet online.
Our main takeaway, however, is that this analysis would suggest that current market prices suggest a reasonable range of perspectives on the future of the decentralized betting space. The analysis above draws the bounds of a rational argument about where the market will head over time, with the primary inputs being (i) what level of penetration into the online gambling market will decentralized apps generally achieve, (ii) at what velocity will crypto-tokens be useful, (iii) what market share will the dominant decentralized gaming platform achieve, and (iv) which platform will achieve that dominance.