Is Crypto Sports Betting Ready for the Big Leagues?

Sports bettors eagerly await a blockchain-powered sports betting service with audited smart contracts, user-friendly policies, low commissions and fees – and meaningful volume.

AccessTimeIconJul 26, 2022 at 4:41 p.m. UTC
Updated Sep 2, 2022 at 6:52 p.m. UTC
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Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.

Kimkibu makes his money betting on sports. Based in South Korea, he mostly trades on Betfair, one of the largest online betting exchanges, where wagers are placed in British pounds, U.S. dollars and other government currencies.

Last year he began trading on cryptocurrency-based platforms including Polymarket, Degens and SX Bet, mainly because the commissions taken out of winnings were cheaper than on Betfair.

"If I find something similar with low commissions, I move there," Kimkibu said.

This piece is part of CoinDesk's Sports Week.

Still, these alternative betting venues account for only 10% of the Istanbul native’s trades. "I wish I could totally move to these platforms from Betfair, but, sadly, they don't have enough volume," Kimkibu said.

Lurk in any one of more than a half dozen sports betting Discord servers or Telegram channels and you’ll find thousands of people like Kimkibu.

Frustrated with incumbent exchanges’ high costs and minimal innovation, these gamblers are eagerly waiting for the right blockchain-powered sports betting service to open, one with audited smart contracts, user-friendly policies, low commissions and fees – and meaningful volume.

The prize for whoever delivers such a service is ample: According to Grand View Research, the global sports betting market is forecasted to grow to $182.12 billion in revenue by 2030, from $76.75 billion last year.

While users like Kimkibu wait, new builders are jumping in and traditional betting sites are testing the waters of decentralized technology. Regulators are watching.

Stacked deck

The old casino adage, "The house always wins" reflects bettors' experience of always being put into an inferior position, with stacked odds. Online betting has faced numerous issues such as account limitations, rejected payouts, a pervasive lack of trust and sense of unfairness, and high fees on deposits and withdrawals.

Winners are not always handsomely rewarded in the traditional sports betting world. Betfair charges a 20% commission, called a premium charge, from players who win more than 250,000 British pounds. Also, some centralized sports betting platforms reserve the right to limit the size of bets. If you are too good at betting, your bet – and hence potential winnings – could be capped.

Some see blockchain technology offering a solution to all those problems: decentralized, transparent platforms that allow customers to control their funds without third-party interference. Each transaction is governed by a smart contract, a self-executing software program. Users wouldn’t have to trust decentralized prediction markets with their funds.

While sports betting may seem like a vice, it has potential benefits for nonparticipants. Much like prediction markets for events like elections or the weather, sports markets challenge traders to put their money where their mouths are. If these markets became big and liquid, the winnings to be had could theoretically encourage those with true expertise to express their beliefs about what will happen through their bets. That, in turn, would provide the public with a more accurate and reliable picture of “expert opinion” than bloviating pundits or sportscasters.

Some accoutrements of the blockchain, particularly decentralized finance (DeFi) activities like yield farming and liquidity provision, could help generate sufficient liquidity and volume to produce high-quality information.

Where to build

Thousands of transactions happen in sports betting each day. Decentralized sports betting exchanges fell victim to high on-chain computation, or gas, fees.

When it launched in March 2018, SX Bet (formerly named SportX), a peer-to-peer betting exchange, was built on Ethereum, the second-largest blockchain. With activity during the “DeFi summer” of 2020 driving up gas costs on Ethereum, SX had to pause the addition of new betting markets. It then moved to Polygon, a parallel network to Ethereum where the fees were lower. But Polygon fees started to creep up, too, so in May 2021 the SX and Polygon teams teamed up to build a blockchain just for the sports exchange, with the goal of further cutting transaction costs.

All these projects are still on their way to finding a suitable place to settle down. Various blockchains have different characteristics that might be more appealing to various marketplaces. "There is just going to be experimentation, like when we figured out different ways to do electricity or communications," said Clay Graubard, founder of media and information company Baserate.io and a longtime observer of prediction markets.

Some decentralized sports betting protocols, such as Divvy, Aver and BetDEX, are building on the Solana blockchain, known for its cheap and fast transactions and ability to expand.

"If there's any delay when it comes to gamblers, they're not going to come back at all," said Carlos Liang, the founder of Divvy, a decentralized betting protocol.

However, over the 18 months, Solana has suffered multiple outages.

The elephant in the room

Winning the blessing of regulators is the inevitable hurdle for prediction markets of all stripes, including sports betting exchanges. Some, like Gnosis, have tried hard but failed, then pivoted to becoming an investor, supporting similar projects.

"We tried to get a license in Gibraltar to operate prediction markets. And it took us several years until we stopped trying,” said Stefan George, the co-founder of Gnosis.

Earlier this year, decentralized predictions platform Polymarket (which offers betting on sports along with politics, coronavirus, crypto and other topics) was fined $1.4 million by the Commodity Futures Trading Commission (CFTC) and agreed to bar U.S. residents from trading. It continued to serve traders in other parts of the world and opened new information markets just three weeks after the enforcement action.

Months later, Polymarket signed up J. Christopher Giancarlo, the former head of CFTC, as the new chairman of its advisory board. Harry Jones, a Polymarket representative, told CoinDesk that Giancarlo is a "very useful addition to the team." Polymarket’s goal is "absolutely to return to America with a regulated offering by the CFTC."

For now, decentralized sports exchanges may not take U.S. money. Only Kalshi, a centralized prediction market platform, is licensed by the CFTC to list event contracts. (PredictIt, a popular site for election markets, operates under a special dispensation from the CFTC.) However, there are no sports markets among Kalshi’s offerings. No wonder: Cryptocurrency derivatives platform ErisX withdrew a proposal to list future contracts tied to the outcome of National Football League games, anticipating that the CFTC would deem it to be prohibited gambling.

If the CFTC were to change its stance, such markets could serve a valid risk-management function for sports-related businesses, much like wheat futures contracts protect farmers from wild price swings, argues Brian Quintenz, former CFTC commissioner.

"If you're a restaurant owner whose business fluctuates wildly, depending on the success of a sports team [and] there's actually now a contract that allows them to hedge some of that risk, why is that any less legitimate?" said Quintenz, who is now a Kalshi board member but spoke in his capacity as a private individual.

One foot in, one foot out

Eyeing the rising builders in decentralized sports betting projects, some legacy sports betting players appear to be doubling down on their crypto plans.

After its marketplace for non-fungible tokens (NFT) clocked $44 million in sales, sports betting giant DraftKings became a Polygon network validator. DraftKings’ public development roadmap calls the potential to accept crypto payments from customers a "win/win" proposition. Customers want to be able to pay with crypto, and DraftKings wants to accept it, the company said.

Stake.com, an online casino licensed by the Dutch Caribbean island of Curaçao, is a step ahead of DraftKings and then some: it deals only in cryptocurrencies.

In the eyes of blockchain-based sports betting projects, merely accepting crypto pales in comparison to what they are building. However, the incremental steps taken by centralized players could draw more retail participants to crypto and Web3, making the pie bigger.

"I think that whatever applications that are built in the ecosystem to go after the much larger user base and slowly bring them on are only beneficial to everyone who's in that," said Varun Sudhakar, CEO and co-founder at BetDEX Labs Inc.

Game time?

George at Gnosis said now is at least a much better time to build a decentralized sports betting platform than when his firm tried.

But there are still lots of problems that need to be addressed. The most prominent one is the lack of volume.

SX Bet told CoinDesk in an email that it is a week or so away from hitting $200 million in cumulative bets since inception. Over half of that volume has happened in the last six months alone. However, by Kimkibu’s reckoning, Betfair could do that much volume in a month.

Solutions are also brewing. Some projects aim to utilize DeFi technology to attract liquidity and boost volume. Azuro, in which Gnosis is an investor, claims that it has created a new liquidity pool design, allowing any liquidity providers to contribute to the pool and gain exposure to all betting markets happening on the protocol. The money in the pool will be used for seeding initial liquidity behind thousands of betting markets.

Although Gnosis stepped back to become a behind-the-scenes supporter in this area, it learned a lesson that, in the end, the winner of this race would be the one that can get in the next wave of users.

But at least gaining those crypto natives should be a good start. Lots of participants, like Kimkibu, have been waiting a long time for a suitable service to arrive.

"Hopefully, next year with new startups I'm hoping to bring at least 50% of my trades to those projects," Kimkibu said.

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CoinDesk - Unknown

Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.

CoinDesk - Unknown

Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.