On-Chain Gambling

Introduction

Human nature and gambling have been linked together as far as history goes back. Pick any time period, and there is evidence of humans wagering on games in one way or another. Whether it was betting on your favorite gladiator in the Colosseum or strolling into a Vegas casino and playing the slots, history has proven that humans love to gamble. In modern society, there are more and more ways for humans to get their gambling fix. Traditionally, humans would have to go to the casino or racetrack to place their bets, but technology has significantly lowered the barriers of entry so that the average person can find a multitude of things to gamble on from the comfort of their couch with just a phone and an internet connection. The next wave of gambling mania may be fueled using blockchain technology with on-chain sports betting, Web3 eSports, crypto casinos, ultra-high leverage trading, and unique crypto experiences.

Different Types of Gambling

Two large umbrellas encapsulate the various gambling games: games of skill and games of chance. There is certainly a grey area between the two, and arguments can be made for both sides for some games, but the general consensus is outlined below.

Skill Games

Skill games are a form of gambling in which a player has a competitive advantage over other players due to their heightened ability at the game. Similar to how one athlete may be better than another, some skill game players outplay their opponents. The largest forms of skill gambling include sports betting, prediction markets, poker, and blackjack. Although the outcomes of sports or which card a player is dealt are unpredictable, the strategies that players incorporate offer them an edge over other players. Professional sports bettors often have their own quantitative models that assign a probability to a given outcome. If there is a discrepancy between their assigned probability and the public odds, the bettor has a potential money-making opportunity. In games like poker, a player competes against other players and needs to understand probabilities, risk management, make quick decisions, and understand how other players at the table think and operate. All these factors dictate potential advantages.

Games of Chance

Games of chance include gambling games in which the player has no way of impacting the probability of them winning or losing. Examples of chance gambling include casino games, bingo, the lottery, or scratch-off tickets. Casino games such as roulette or slot machines are some of the most popular games as they are easy to understand for the average person. The outcomes of these games have fixed probabilities in which the casino has a slight advantage over the long run. Lotteries are the other most popular form of chance gambling which often avoids the social stigma of gambling that casino games hold, likely because the Multi-State Lottery Association operates Powerball and Mega Millions and people can run into their local gas station and purchase tickets versus having to go to a physical casino.

Gambling Business Models

Gambling companies have relatively simple business models in terms of revenue and profit generation, but there are differences between the skill and chance games, although both operate the same in that there is a “house” willing to take wagers on various outcomes.

In sports betting and prediction markets, the house will set an opening line to assign a probability of an event outcome. The higher the likelihood of something happening, the more money must be wagered to receive a fixed payout. The catch is that the house bakes in the vigorish or “vig” into the probabilities, similar to an interest payment for being the market maker. In the U.S., odds are centered around receiving a payout of $100, with a (-) indicating a favorite and a (+) indicating an underdog.

Take the example below where the outcome of Team A or Team B winning a game is equal. The odds (with no vig) would be 100, but the traditional vig on a 50/50 game is 10 points, so a bookmaker would list the odds for either outcome at -110.

The goal is to have an equal amount of money on each side, so the game’s outcome doesn’t matter, and the house can just collect the vig. If money comes in unevenly on one side of the game, the house will adjust the odds to incentivize bettors to wager on the under-allocated outcome. This is how prediction markets work as well. Initial odds of an event, such as a political election are set, and then the odds will shift as bettors wager on each side of the binary event.

Chance games have more straightforward mechanics for profit generation because the odds are fixed for each game. For example, in roulette, the wheel has 38 different numbers (37 outside of the U.S.) numbered from 0 to 36 with an additional 00 slot. Half the numbers from 1-36 are red, half are black, and 0 and 00 are green. When a person wagers on red or black, the payout is 1:1, implying a 50% probability, but the odds of landing on either red or black are equal to 16/38 or 42%. This simple advantage is where the saying “the house always wins” originates. Most casino games tilt the odds slightly in the house’s favor, so they always bank a profit in the long run. Sure, a person can get hot and win on a given night, but over millions of spins, the odds will tilt in favor of the casino.

Market Size

The gambling industry is a massive market globally. It is expected to grow from $287.43 billion in 2021 to $458.93 billion in 2026 at a CAGR of 5.2%. By 2030 the global gambling market is expected to reach $896 billion[1].

The online gambling market (iGaming) is where crypto is best positioned to disrupt the market. iGaming is the fastest growing portion of the industry due to post-pandemic consumer habits, increased digital content consumption, and improved digital technology. iGaming is expected to grow from $58.2 billion in 2021 to almost $146 billion by 2030 at a CAGR of about 12%[2]. The strong growth can be seen in U.S. State annual gross gambling revenues (GGR) for the last three years in the chart below:

Traditional players are still the market leaders in iGaming, but web traffic data has started to show an increasing amount of users visiting crypto gambling platforms, with Stake.com actually seeing more web traffic than Fanduel, who is one of the largest names in the traditional industry.

Why Crypto Will Disrupt Gambling Markets

Crypto gambling platforms operate similarly to traditional gambling companies, except they leverage the technology and utility of crypto to enhance the experience. They also benefit from appealing to a target market of crypto users that is likely more risk-tolerant than the average person, given that they are already interacting and investing in a nascent technology. The total addressable market for gambling is massive, and crypto platforms have a few comparative advantages that should help them take market share from traditional players. The main drivers which will propel crypto companies include technological benefits and trends, unique and increased user incentives, more game options, and the growth of Web3 gaming.

Technological Advantages & Trends

As the world becomes more digitized, the amount of assets that are being held in digital form continues to rise. For example, the use of stablecoins as a form of payment can be visualized below via the total amount of stablecoin transfer volume over the last three years.

As the general population becomes more comfortable with stablecoins, the amount of assets stored on-chain should continue to grow. As users hold their assets in mobile wallets, the ability to visit a crypto gambling site and immediately link their wallet and begin gambling becomes seamless. Digital wallets have already penetrated 40% of the global population with 3.2 billion users, and that number is expected to grow 8% annually, penetrating 65% of the global population by 2030[3]. The number of unique digital wallet users is exceedingly outpacing that of traditional bank deposit accounts and is forecasted to continue its trajectory.

Digitalization and mobilization trends should fuel the growth of crypto casinos as profit margins for online businesses will be much larger without operational expenses related to brick-and-mortar businesses. Bets placed on mobile devices far outpace that of desktops or tablets, and crypto is beginning to penetrate iGaming revenue compared to fiat currencies.

Additionally, the standard benefits of blockchain technology are easily applied to gambling, offering users both security and transparency in their transactions. Blockchain gambling eliminates the need for a middleman responsible for the custody of your assets and payments in the case of a win. Smart contracts enable the safe storage of assets and guarantee of payments, and fairness of all games can be verified via on-chain data. Cheating scandals are regular news headlines in traditional card game tournaments, and blockchains will quickly alleviate these problems. Lastly, automated and instant payments offer users quicker access to liquidity compared to exchanging chips or a bet ticket at a casino’s cash window.

Unique & Increased Incentives

Crypto gambling platforms currently offer users better incentives than traditional companies, while simultaneously giving bettors a new and unique experience. Some platforms such as Rollbit offer users a piece of platform profits or hefty rewards to encourage more gambling on the platform. Rollbit was one of the first crypto gambling platforms to issue their own NFT collections, called Rollbots. Rollbots are a collection of 10,000 unique NFTs generated algorithmically and enable owners to become a “Rollbit VIP” which comes with perks such as exclusive games or profit sharing with the platform. The different NFT traits offer holders different levels of utility.

Rollbots were such a success that Rollbit has released a second collection called Sports Rollbots that offers utility related to the Rollbit Sportsbook. Benefits include a share of sportsbook profits ranging from 10%-40%, free bets, and sports betting odds boosts. Holding these VIP NFTs has provided a source of income to gamblers who otherwise would receive nothing in a traditional casino.

In addition to the VIP benefits a crypto user can gain from purchasing NFTs, Rollbit offers various bonuses to gamblers:

• Rakebacks – a reward credit based on the house edge of the game a person plays. Rollbit will give users 5% back on all bets.
• Daily/Weekly/Monthly Bonuses – These bonus are rewards offered every day/week/month based on a player’s profit and amount wagered. The more a person wagers or loses, the more they will receive in bonuses.
• Rank-up Bonus – As users reach certain milestones such as a total amount wagered on Rollbit, they will receive increasingly larger bonuses. The higher the rank, the larger the bonuses will become. This offers users a gamified and social experience, racing other players to achieve the highest rank.

Continuing to use Rollbit as an example, they have created unique use cases for their token $RLB, which is essentially used as a ticket for the Rollbit Lottery. Holders can stake their RLB, and their amount staked gives them a proportional amount of chances to win the Rollbit Lottery, which is equal to 20% of Rollbit’s casino profits. Winners are drawn every 100 Bitcoin blocks, and have been a huge draw for the platform.

Rollbit has implemented a unique mechanism to the lottery so that when users stake their RLB tokens, a 0.2% fee is taken, with half the RLB fees being pooled for future airdrops to Rollbot holders, and the other half being burnt. This creates a deflationary dynamic for RLB, as 34%[4] of the total supply has been burnt so far. A positive flywheel begins to emerge as more gamblers find their way to Rollbit, Rollbit generates more profits, the lottery pool size increases, the incentive to buy and stake tokens increases, more supply gets burned, and so on and so forth. This flywheel may have begun to spin as the RLB token price has skyrocketed in recent months.

The bonuses, perks, and novel dynamics offered by crypto platforms give customers a unique experience aligning player incentives while lowering the requirements that are often needed to receive VIP benefits from traditional casinos.

Increased Gambling Options

Another reason crypto casinos are gaining in popularity is due to the wide variety of games to gamble on. Crypto platforms are one-stop shops for almost any form of gambling. In addition to traditional forms such as poker, slots, and lotteries, users can trade crypto with up to 1000x leverage, trade or borrow against NFTs, offer their NFTs as lottery prizes, bet on crypto-specific prediction markets, create their own challenges, or play in-house created games. The variety of games has given way to social dynamics where everyone can see the top gambler for the day, and platforms host “races” to see who can be the quickest to win a certain amount. The experience is truly one of a kind and it can all be accessed from one’s phone or computer.

Further integrations of NFTs or social tokens are likely to be implemented into crypto casinos. Fantasy sport games are an area which have not been tapped yet. In the future, they can potentially be played with NFT player cards, like traditional trading cards, except with added elements of utility and financialization. Athletes could potentially issue social tokens where the price is tied to their real-life performance or directly affects a crypto fantasy sport game. In our previous Crypto Concepts Social Tokens piece, we discussed the different dynamics of sports tokens, which can potentially be used as bet rebates or the unit of exchange for placing a bet on a specific team. The possibilities for crypto platforms to offer new and exciting experiences to gamblers far outweigh that of traditional entities.

Growth of Web3 and eSports

eSports have become a major gambling event for people globally and the market is expected to continue to grow rapidly. The global eSports market was valued at $1.18 billion in 2021 is expected to grow to $5.74 billion by 2030[5]. The largest eSport tournaments garner massive audiences worldwide.

Given the growing popularity of eSports, it is likely that crypto gaming follows the same trend. Crypto gaming is obviously a nascent sector, but it has a huge amount of interest from venture capitalists already. In our 2022 Fundraising Report, Metaverse & Gaming companies raised nearly $5 billion across 160 deals in 2022. As all these gaming companies develop their products and attract real players, it can be expected that gambling markets will open for on-chain outcomes. It’s possible to imagine a scenario where P2E games fuel increased gambling or vice-versa as the on-chain economy expands.

Risks / Roadblocks

The biggest headwind for crypto gambling platforms to gain steam is the strict regulations that surround the gambling industry. Many of the current platforms have front-ends that are restricted to U.S. users due to the gaming license requirements, which are extremely difficult to obtain. Additionally, different regions have different rules and regulations, therefore an online platform open to users worldwide needs to be aware of necessary rules and regulations in any region where they are serving customers.  

Secondly, legal gambling operations (in the U.S) are required to adhere to strict know-your-customer (KYC) and anti-money-laundering (AML) regulations. Part of the current allure of crypto is the ability to remain pseudonymous and transact freely. If that is stripped, users may be more inclined to go down traditional avenues for their gambling.

Lastly, there is still a lack of clarity around general crypto regulations and asset classifications. The use of crypto tokens for wagering, receiving rewards, staking, or any other activity add an additional element of legal complexity for gambling operators and end-users.

Conclusion

Humans have been gambling since the dawn of time, and the trend doesn’t seem to be stopping anytime soon and looks to be accelerating due to modern technology and digitalization. Crypto gambling platforms are well suited to capitalize on overarching gambling trends as more assets and content become digital. Underlying blockchain technology combined with novel and unique experiences should propel the crypto gambling industry forward as long as operators can stay ahead of jurisdictional regulations.

[1] Researchandmarkets.com

[2] Custom Market Insights

[3] Ark Invest: Big Ideas 2023 Report

[4] Rollbit as of 1/17/23

[5] Straits Research