A prediction market or betting market is simply an exchange-traded market where individuals can bet on the outcome of various events with an unknown future. The events range from future commodity prices, yearly revenue results of a company, exchange rates, etc. Prediction markets have been around since ancient civilizations. Kids are exposed to prediction games by guessing and sometimes placing bets on which school team will win the football tournament or who will top the class.
Nowadays, prediction markets span politics, entertainment, sports, stock prices, crypto prices–anything under the sun. The big deal about prediction markets is that they have been shown to consistently outperform traditional prediction models such as expert panels, analyst opinions, and public polling.
According to a Harvard Business Review article, ‘the combination of multiple, independent judgments, i.e. the wisdom of crowds is often more accurate than even an expert’s individual judgment.’ The premise is that people make better, more informed forecasts when they have to put money on them. Imagine if you had to stake money to vote in web3 and unstaking could take longer if you were wrong.
While prediction markets are often considered gambling platforms, they have benefits beyond people trying to make a fortune with a guess. Prediction markets can support the growth of healthy and functioning societies. The more accurate the forecasting data, the better decisions governments, institutions, and companies can make, whether in sound public policy planning, governance, or creating products and services in line with societal values like sustainability and ethics.
Prediction markets can even help counter the proliferation of fake news. Balaji puts it right in his tweet: “Blockchain-based prediction markets may be the one force strong enough to counterbalance the spread of incorrect information on social media. They give people a financial incentive to seek the truth and then protect them with the twin shields of pseudonymity and decentralization.”
While I do believe that betting is a very primitive and simplistic application of blockchain technology, the market is commercially huge and may pave the way for mass user onboarding.. Prediction markets in crypto are nascent, still struggling to gain traction and comply with regulations, the evolution of these markets, particularly in sports, is something we wanted to look deeper into.
The History of Sports Betting
There have been scripts unearthed in Ancient Egypt, believed to be around 3000-4000 BC, which reveal that laws had been written to control the spread of gambling.
- The earliest record of sports wagering goes back more than 2000 years.
- A couple of centuries later, betting on sports like boxing, wrestling, running, and discus became popular, but horse racing reigned supreme.
- As per historians, the first popular sport that drew bettors was probably ‘chariot racing.’
- At carnivals and fairs, visitors had the opportunity to bet on the noble sport of shin-kicking (betting on who can’t take the pain and gives up first).
Gambling started becoming popular in England due to horse races. Betting on the ponies was a favorite pastime amongst the rich and elite. It wasn’t until Charles II’s reign, that betting on horse racing became accessible to the public at large.
Innkeepers and pub owners promoted the sport and naturally became the first bookies. This gave rise to a variety of side races organized by these bookies, such as steeplechases (a race where riders rode from one church tower to the next by jumping over everything in their path). But, as the British government realized that gambling in close vicinity to alcohol led to some disastrous consequences, they banned it in pubs, which gave rise to betting shops.
Within a year after the Betting and Gaming act of 1960, there were reported to be around 10,000 new gleaming bookies on the high streets of Britain. Bookmakers kept track of transactions and, in cases of disputes, would often act as arbitrators in betting.
In the US, with the rise of professional baseball in 1876, traditional sports betting came to the forefront. Quickly, the games started being influenced by gambling, but people didn’t see it as anything more than an occasional pastime (also, it was illegal).
But in 1921, sports betting became legal in Nevada, especially in Las Vegas Casinos. But if you were not close to a casino, you couldn’t really play. That gap was soon filled by the mobs who offered sports wagering and number-games coast to coast. While it was still illegal, the cops let it pass, turning a blind eye to it. The problem? If you placed your bet through a dishonest bookie, there was no recourse through law.
Players and Mechanics
Let’s understand a few things in detail and then look at the existing betting landscape before we discuss how blockchain technology can change the industry.
The Brokers aka Bookmakers
The word book in bookmaker refers to a record of bets. The word maker is used in the same way as the related word oddsmaker. A bookmaker is often also an oddsmaker—the person (or organization) that sets the odds for a particular contest. Online bookmakers make money on sports betting by acting as intermediaries taking bets from customers. They do this by setting the odds to achieve a bookmaker’s margin. By adjusting the odds, bookmakers can control how big a profit they will gain on each match or whatever type of bet they offer.
How do these Bookmakers make Money?
Making money in the betting industry is a matter of setting the odds to have a profitable margin, so the House always wins.
There is a really interesting video explaining the math behind the House always winning. The main technique bookmakers use to put the odds in their favour is the inclusion of vigorish. Vigorish, or vig, is also known as juice, margin, or the overround. It is built into the odds that bookmakers set to help them make a profit. In essence, it’s a commission charged for laying bets. To best explain vig, we’ll use a simple coin toss example.
The toss of a coin has two possible outcomes, and each is equally likely. There is a 50% chance of heads and a 50% chance of tails. If a bookmaker were offering true odds on the toss of a coin, they would offer even money. This is 2.00 in decimal odds, +100 in moneyline odds, and 1/1 in fractional odds. A successful $10 bet at even money returns $20, which is $10 profit plus the initial stake back.
Let’s say this bookmaker had 100 customers, all betting $10 on the toss of a coin, with half betting on tails and half betting on heads. The bookmaker would stand to make no money at all in this scenario. Duh!
This is precisely why they build in the vig to the odds. They can thus guarantee, theoretically at least, that they will make money regardless of the outcome. When two outcomes are equally likely, they commonly use odds of 1.9091 (-110 in moneyline, 10/11 in fractional).
Continuing with the coin toss example, the odds on heads and tails would still both be the same, but they would now be at 1.9091. This means that a successful $10 would return a total of $19.09 ($9.09 in profit, plus $10 original stake). Now, with 50 customers betting on tails and 50 customers betting on heads. The change in odds has made a big difference, and the bookmaker is now making a guaranteed profit on every coin toss. The total amount they payout will always be $954.50 against the $1,000 they have received in total wagers. Their built-in profit margin of $45.50 is called the vigorish, or overround, and it’s usually expressed as a percentage of the total wagers received. In this case, the vig is equal to roughly 4.5%.
Where are we today?
Online gambling has broadly surged in recent years both in the US and abroad. 22+ states in the US have legalized online sports betting. As per a report by Fortune Business Insights, the global online gambling market is projected to increase from US$ 66.72bn in 2020 to US$ 158.2bn by 2028. Online betting faces a series of challenges –
- A lack of trust between parties and a low level of transparency.
- Casinos that operate outside the US and legally want to serve Americans need to register with each state where they operate, and often put in efforts to verify customers’ physical locations.
- In September 2020, sports betting operator DraftKings made a US$ 22bn offer to acquire competitor Entain — operator of BetMGM and owner of brands such as Ladbrokes and Coral Betting. Thie deal reflects the state of an industry dominated by large, centrally-controlled corporations.
- Players usually need to place trust in the centralized operator, which can hold the user’s funds for any particular reason and often imposes deposit and withdrawal limits.
In a traditional online casino, players deposit funds to bet or play and then withdraw funds when they are finished playing (relying on the operator’s integrity to settle as and when requested).
Moving funds is expensive, hence, operators are incentivized to make it difficult and time-consuming for players to withdraw funds. Peer-to-peer transactions allow users to bet with one another without any fee going to the House. Manipulation of data and lack of user trust combined with payment constraints are a few problems existing in the online gambling industry. Peer-to-peer transactions allow the creation of more efficient marketplaces with elimination of unnecessary intermediaries.
Blockchain in Betting
What can Blockchain do for the Betting Industry?
The emergence of blockchain technology has created a unique opening for forward-thinking compliant brands in the sports betting ecosystem. This untapped territory could lead to an entire betting universe where self-regulated organizations are operated autonomously, independently, and democratically on the open blockchain. A truly trustless, immutable, and unbreakable system can evolve.
- Casinos have been exchanging cash for tokens (in the form of chips) long before cryptocurrencies were around, and the betting industry has already embraced digital payment methods.
- Many platforms already allow users to participate in sports gambling using cryptocurrencies. An analysis from bitcoin casino statistic tracker Bitcoin Strip analyzed data from sixty crypto gambling sites to find that people are placing a staggering 337 bets per second & as per Fairlay – a bitcoin prediction market and exchange – 90% of its volume is derived from sports betting crypto.
Blockchain and cryptocurrencies can greatly expand this trend. As we explain, this technology can advance the mission-critical objectives of the online betting industry, including the security, validity, anonymity, and cost-efficiency of the industry’s core transactions.
Security and Validity
Blockchain technology in online gambling provides an added layer of protection for users because the databases record all transactions and store the information in a decentralized ledger. This technology reduces the risk of both hacking and payment duplication.
Anonymity and Privacy
Data privacy is a concern for many online gambling users because websites commonly require them to disclose personal information, which creates hesitation among individuals who worry about how and where their data will be stored. Cryptocurrencies provide an opportunity for websites to eschew requests for detailed information because transfers of cryptocurrency are immediately validated by the public blockchain. This protection of user information further reduces the risk that personal data will be compromised. The information can be utilized by the government agencies for tracking, analytics and taxation without compromising on the user’s privacy.
Efficiency and Access
Relatedly, betting websites which use digital assets can provide users with a streamlined registration process because of their ability to operate without unnecessary personal information. As a result, these digital-asset-friendly websites may be better positioned than their non-crypto-accepting competitors to attract potential users, who can begin playing immediately upon providing only an email address and a username.
Instantaneous and Cost-Effective Transactions
Blockchain technology and cryptocurrency in the gambling industry also provide efficiency through instantaneous transfers. When online gamblers deposit cryptocurrency into a gambling platform, they do not need to wait for a bank or third-party company to verify the decentralized transactions, which are not currently controlled by a central authority. Instead, the blockchain immediately verifies the transaction, and the platform learns instantly whether it is valid.
The decentralized nature of cryptocurrencies also makes them more cost-effective than other payment sources like credit cards or bank transfers.
The Bettors benefit from quick transactions, safe deposits (no more bank declining transactions), higher limits, transparency, and lower fees, while the bookies could take advantage of the cost efficiency, robust data, and increased security.
Challenges? Of course!
While the web3 tech still fights the challenges of oracles, pricing and regulations, using blockchain for sports betting has its own set of challenges –
- Lack of regulation for the use of cryptocurrencies
- No way for the platform to identify and verify the source of funds
- No chargebacks!
- Price volatility of the crypto-currencies
- With anonymity, we increase the risk of match-fixing and market manipulation
- There is no way to stop gambling addicts as they would just go and use another wallet if one gets blocked. In a KYC’ed platform, there are services that allow people to pre-emptively block themselves from gambling at any registered casino or sportsbook.
- Unregulated marketplaces could be run by unscrupulous operators with little or no consumer protection
Well, why this segment has exploded in a very short amount of time, Alex Costello, the vice president of government relations at the American Gaming Association, a trade group that lobbies on behalf of U.S. casinos and registered sports betting companies, has probably rightly said that –
“We are a highly regulated industry for a good reason: anti-money laundering concerns, responsible gaming concerns.”
Author – Jaskirat Singh, Product and Ecosystem, Woodstock Fund