Tl;dr: Some thoughts on how decentralized prediction markets could disrupt the gambling industry.
Maybe it was because I was in New Jersey, a state that has recently legalized sports gambling, that it occurred to me.
The gambling industry is very susceptible to blockchain-based disruption.
I’m not an expert on the internal operations of gambling businesses, but conceptually I think I get it.
A gambling operator is going to want to balance the amount of bets on one side of the equation versus those on the other amount in such a way that it is profitable no matter the outcome.
The profits of the gambling industry would seem to come from maximizing that equation and simultaneously keeping the back-office costs low.
That part, the back-office is where the existing industry may be vulnerable to a decentralized approach.
In both the traditional (centralized) and decentralized models, there is an algorithm that adjusts the odds and payouts based on the market’s perception of the likelihood of an event occurring (say Elizabeth Warren getting the Democratic nomination).
Here’s the key difference though.
A centralized gambling operation has accountants, bookkeepers, IT people, security concerns, lawyers, and much more.
A decentralized protocol like Augur or Gnosis has none of that.
They have smart contracts.
That will lead to costs that are orders of magnitude lower than a centralized entity, particularly at scale.
Augur, for one, is driving towards that future with the announcement of their new decentralized affiliate marketing program.
Even better, because of the decentralized, permissionless nature of the protocols, different entities can build solutions on top of the global pool of liquidity.
They can also customize the solutions for different geographies and use cases, including KYC/AML scenarios or compliance with local regulations.
So, for example, Veil and Guesser have built on top of Augur but Veil is off limits to US customers while Guesser is not.
As a result, I think what will happen is that the odds for the same bet (Warren is nominated) will have better payouts in a decentralized model than a centralized one.
Instead of a few percentage points going to the ‘house,’ those points will be divvied up (in some ways) to the bettors themselves.
Better payouts will attract more participants, drawing customers from the incumbents.
How Gambling Companies are Vulnerable to Crypto-Disruption was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.