Betting On The Blockchain - What It Means For Bookies

In a recent interview I did for Star Sports betting, I concluded the interview by predicting that major bookmakers would be in serious trouble within 10 years, and within 15 years the bookmakers we know and love today would mostly be out of business. A heady assertion to make considering I was being interviewed by a bookmaker.

I attributed this to the rise of decentralised betting platforms running smart contracts on blockchain technology. As someone immersed in the world of technology, it's part of my job to keep up to date with where things are heading, I'm confident that the rise of blockchain technology will affect us all in the coming years.

What is the blockchain?

The blockchain could be considered a database of which a full copy is held by all members of the network. This is opposed to the current model of data being siloed in a centralised entity such as the William Hill, Ladbrokes or Facebook server rooms.

If a hacker gains access to William Hill's systems, they can cause signficant damage to their business. With blockchain, because that database (or 'ledger') is distributed to everybody on the network, attacking a single node will have no effect because blockchains work by majority consensus, you'd have to attack 51% of the entire network before your attack was successful which is practically impossible.

Most people's knowledge of blockchain is limited to Bitcoin, while we have methods to send money over the internet with our credit cards, settlement and acknowledgement of those funds is handled by 3rd parties, banks, Paypal, who will update your balance on their systems, send the money to the recipient (and usually take a cut for themselves). However, with Bitcoin and other blockchain technologies both value and settlement are built into the same transaction. If you sent Bitcoin to another address, that transaction is broadcast to all nodes on the network which go on to update their ledgers. The benefit of blockchain is that it is 'trustless', you don't need to rely on any third party and even the money you have is held in a cryptographically secure 'wallet' that no supercomputer could ever break into.

Blockchains can not be shut down by any government - unlike a centralised business which can be shut down or seized, blockchains are as global as the internet itself so regulations are ineffective, furthermore blockchain transactions are (by and large) anonymous so anyone in the world can partake in them wherever they are in the world.

What is a smart contract?

A smart contract is simply a piece of code that exists on the blockchain which is able to move money dependent on specific conditions, anybody can create a smart contract. So for example, I may run a business with 10 employees. My smart contract has how much each employee needs to earn coded in, I send my money to the smart contract and it distributes the funds appropriately.

Smart contracts can become extremely complex, and depending how much information we put on the blockchain, we could one day see a time where a person could purchase a house without lawyers or estate agents. Simply by sending money to a smart contract which in turn ensures you meet all the conditions required to make that purchase and releases those funds to the current owner. Because the blockchain can't be modified and is public, it serves as absolute proof that you are the owner of that house.

In short, a smart contract is something you could send money to, and if condition A is met, it might send the money one way, if condition B is met, it could send the money the other way. It's easy then to see how this could be applied to betting markets.

Isn't this a bit far-fetched?

Not particularly, we have the benefit of being able to look back at other technologies once considered far-fetched and compare them to today, take this clip from a 1994 episode of Tomorrow's World about the internet (or the information superhighway as it was known then). Back then it likely seemed a bit niche and pointless, however when we consider the transformation of the entire world in just 25 years, the way we do business, socialise and even fall in love - not to mention the industries that became obsolete and the industries that arose as a result - no prospect can be completely disregarded. Bookies have once already had to change their business models at the turn of the millenium as the internet took hold and the public demanded online gambling, the bookies who resisted found themselves falling behind.

Furthermore, back in 1994, anyone could have had the idea for Facebook, the limitation though was physical. We didn't have governments laying underground lines for broadband, we didn't have global coordination to lay undersea cables connecting countries to a globalised internet and we didn't have computers and modems fast enough to handle significant bandwidth. Those problems are now gone, the hardest part of the job is completed and it is applications and development in software built on top of the internet that will continue to shape our lives.

So what does this have to do with betting?

The betting industry as it currently stands has numerous issues. They're tied to stringent national regulations, know-your-customer/anti-money laundering laws, tax laws and responsible gambling obligations. For punters, it's often the case that winners are restricted to pennies and liquidity is too low.

Unfortunately for bookies, decentralised betting platforms threaten their businesses. There already exist early-stages of betting platforms run entirely on smart contracts where anybody can create a market, anybody can bet on that market and the settlement of that market is decided by the majority consensus of the members of that blockchain (who are financially incentivised to be honest).

This means that instead of liquidity limited to the UK, you have anybody in the world betting on any market and the huge liquidity that brings. North America has long been held back by laws against sports betting, the casinos in Macau make 2.5x the money of Las Vegas. No national government can realistically track who is doing what on a blockchain. A globalised liquidity pool is a huge game-changer.

Because these decentralised markets are not run by a centralised profit-making enterprise, there are no restrictions and no limits. Commission is low, often around 1% (which is distributed to those who settle the markets, the honest ones get paid, the dishonest ones don't).

This isn't a pipe-dream, early iterations of decentralised betting platforms already exist (feel free to Google). For example, one decentralised betting market for whether or not Justin Trudeau would be re-elected in 2019 ended with a volume of £80,000, compared to Betfair's £16,000 (https://guesser.com/market/55c27d1f). Considering how incredibly niche this still is, it's something bookmakers cannot afford to not have on their radar.

Right now, the biggest barrier to all these markets are purely a lack of mainstream knowledge and very basic website user-interfaces, just as was the case for the internet back in 1994.

I can think of hundreds of reasons why this could be a bad thing...

No one said it was all positive. A system that combines anonymity, money and lack of regulation can create big problems. One way the USA asserts its global dominance is through its control of the financial system, a system which can be circumvented entirely by subversive states utilising blockchain technology to evade international sanctions - there is evidence of this already taking place. Blockchains that incorporate privacy can cryptographically mask where funds have been sent to allow for rampant tax evasion.

In terms of betting, aside from bookies struggling to compete with totally unrestricted, high-liquidity markets, other problems can also arise. Money laundering by nation states such as North Korea can easily take place. Gambling addicts will have nothing protecting them from financial ruin and many other issues.

With the freedom for anyone to create betting markets, we could even imagine a dystopian scenario where 'assassination betting markets' could conceivably be created. Where so many people have a financial interest in an individual being assassinated that that individual finds themselves in real and perpetual danger which only increases the likelihood of it occurring and thus more people betting on it to happen. There's no question that while blockchain has many uses that can make our lives easier and more efficient, as with any new technology, the propensity for evil is ever-present also.

What can existing bookies do to combat this threat?

They're going to have to use their imagination, business models will have to change. Perhaps do as casinos do with heavy-rollers and provide a 'concierge' experience with punters to encourage brand loyalty. Ultimately though, I have very little hope that profit-based companies employing so-many thousands of individuals managing high-commission, low-liquidity markets can really compete with the combined force of anybody and everybody in the world being able to instantly create low-commission, high-liquidity markets.

I believe adoption will at first be slow, the base-layers of the blockchains themselves still need to develop, but when the first presentable and user-friendly interfaces go live, it's my belief that traditional bookies will face a serious existential threat.