This review explores the potential for blockchain technologies, specifically Ethereum, to revolutionize the sports betting industry. The document discusses the technical nuances of blockchain, including Layer 2 technologies and automated market makers, and how they can be applied to sports betting. It also considers the challenges of regulation, including state revenue capture, league revenue sharing, and balancing consumer privacy with illegal activity. Ultimately, the argument is that sports betting operators, legislators, and leagues must work together to provide high-quality consumer experiences that can compete with blockchain-based products.
Since the adoption of the 1992 Professional and Amateur Sports Protection Act, the United States has been in a heated legal battle between legislators, sports gambling operators, and league executives regarding sports gambling. In it’s most abstract form, a legal contract that allows for the financialization of the outcomes of sports games is digitally a simple matter, no different from the derivative contracts that settle the price of oil or stock prices. The issue is, with open markets on sports outcomes, which typically have less than 10 participants who can alter the state of the game, the opportunity to manipulate markets in the favor of cartels or insiders becomes apparent, with lots of historical examples. The simplicity of creating a financial contract and operating sports gambling over the internet has pushed league executives and operators to demand congress and larger internet service providers to do something to bring the sports betting market under control. Although sports gambling is simply a matter of changing the bits on a ledger account of a winner and loser, socially the integrity of an over 2000 year old institution is under attack.
During this time, the adoption of the internet and personal computing has led to three large phase transitions in computing topology, each time unlocking new applications and business opportunities. In its third iteration, regarded as “web3” compute networks have evolved into distributed extra-legal programs hosted by computers distributed across the globe. These programs, evade any particular nation-state legislation due to the data replication and access of program state from any particular node on the network, allowing for entrepreneurs to operate applications facilitating sports betting. These applications have shown notable improve in speed and transaction costs, and could likely provide enough liquidity to reduce typical fees in legal sports betting operators, who’s costs are usually pushed down to consumers. Anyone with a computer and programming experience to launch a platform that competes with the transaction speed and cost of large scale financial industry platforms such as VISA or the SWIFT network.
It is clear sports betting will be drawn to blockchain networks that support smart contract technologies, specifically Ethereum and it’s related ecosystem of products. This paper suggests a possible future where legislators, league executives, and sports gambling operators resolve to utilize blockchains rather than fight them, allowing for free-market competition to produce high quality products. Below suggests a path forward that can create the transparency and innovation to allow a balance of regulation to maintain integrity of sports, while allowing consumers to partake in sports gambling markets, possibly helping to diversity of their portfolio of investments under responsible gambling conditions.
For over 20 years, regulators, sports league operators, and gambling entrepreneurs have searched for a market configuration that mixes free market economics, tax optimization, and responsible financial activities in the sports betting industry. For most of that time, the configuration was simple. The U.S. government chose an outright ban on any activities that allowed for sports gambling. League operators cited integrity as a main optimization, preventing players from colluding to alter the results of games and make a profit. Lawmakers optimized as well for the prevention of illicit funding and activities related to money laundering.
Within that time, a major change in the landscape of human civilization has emerged: the fact that society has become digitized, and that databases are the main ledgers of transactions of value. Web2 saw a boom in digital technologies by utilizing the connection of thousands of computers across a single network, sharing and computing data to create applications that couldn’t otherwise fit on a single computer. Social networks, machine learning, and distributed data storage emerged, and it is no accident the largest companies in the world spawned from the simple idea of connecting computers.
Yet, in 2009, a paper submitted to a quiet online forum took this further. By solving a simple problem in how computers can coordinate the change of data shared across multiple networks, Satoshi Nakamoto presented a solution to allow for any computer in the world to participate in the open computation and security of a simple datastore. At the time, the datastore recorded the addition and subtraction of a particular numerical amount, named bitcoin, which could only be created by participation of security of the network, and was one of the first forms of digital scarcity. In a strange turn of events, because the computation so secure was linked to energy, the numerical amount had a monetary value due to it’s clear scarcity and demand for control of the changes of these values, spawning a capital market that built and invested funds, producing the next 10 years of developments in cryptocurrency technology.
Further, in 2015, developers Vitalik Buterin and Gavin Wood, with others, created the concept to adapt this network architecture and allow for arbitrary programs to be added to a global compute network. Computers that participated in the security of the network, can validate the manipulation of any state of numbers, strings, and any other encodable data type using the same security model to the whims of any developer that follows the rules of programs deployed onto the system. Since then, the combination of both Bitcoin and Ethereum have created a duopoly. Bitcoin, the simplest and oldest model, remains the most restricted, and therefore strongest network of distributed computers. Ethereum, the most open model, remains the strongest source of network effects and remains the main source of settlement of various distributed programs, even in light of competition. It is no coincidence that these models resemble early forms of Apple and Google’s Android mobile systems, reflecting two design principles that are polar opposites: open design and restricted simplicity, and it is likely these two ecosystems will remain as competitors enter the space to capture more and more value.
In 1991, sports leagues in the U.S.A. pushed lawmakers to to produce federal legislation stopping sports gambling. Then N.B.A. commissionner David Stern testified before the Senate committee, stating, “The interstate ramifications of sports betting are a compelling reason for federal legislation.” League owners felt the integrity of leagues were at threat from gambling operators, who could facilitate bets from players and alter game outcomes. By 1992, the U.S. encoded into law the Professional and Amateur Sports Protection Act (P.A.S.P.A.), which effectively banned all operation of sports gambling in the U.S. This act cut off consumers from mainland businesses servicing gambling except in Nevada and a handful of other grandfathered-in states.
For most of the 90’s the law remained unchallenged. Over the next 20 years however, the rise of technology and internet interconnected information sources making transactions for sports betting as easy as sending a phone call to an offshore bookie. By the 2010s, applications and websites, operated by non-U.S. organizations, could promote and allow users from anywhere in the world to make bets on games. In 2009, New Jersey began the formal process to challenge the law, citing the 10th Amendment of the constitution and directly saying the matter of sports betting should be decided by states. By 2012, Gov. Chris Christie signed the bill S3113 allowing permitted operators to run sports gambling books. For the next 6 years, this law was challenged by the major sports leagues in the United States including the NBA, NFL, MLB and NCAA, pushing the case all the way to the Supreme Court.
During the proceedings, executives in the NBA started to realize after technological advancements, that current law is not actually regulating the sports betting market, and pushing consumers to just bet on unregulated offshore platforms. In a widely cited op-ed in the New York Times in 2014, Adam Silver, then commissioner of the N.B.A., called for congress to “adopt a federal framework that allows states to authorize betting on professional sports, subject to strict regulatory requirements and technological safeguards.” In it, the op-ed highlights an estimated $400M spent by U.S. persons betting on off-shore accounts, noting that the law only pushes consumers to use shady illegal platforms, and offers a path forward to legalize and regulate the market to protect consumers who do wish to gamble. By then, sports betting in the U.K. was being done via smartphones, and the market was clearly growing. Mr. Silver directly stated, “mandatory monitoring and reporting of unusual betting-line movements; a licensing protocol to ensure betting operators are legitimate; minimum-age verification measures; geo-blocking technology to ensure betting is available only where it is legal; mechanisms to identify and exclude people with gambling problems; and education about responsible gaming.”
The writing was on the wall that technology would win, and betters clearly wanted a market for sports betting. In 2018, the Supreme Court ruled in favor of New Jersey, and opened the gates for new sports betting operators to run in the United States. With the precidence in place, states and businesses began to negotiate for sports betting operator licenses, as cash strapped state treasuries looked to replicate the success of Nevada, and gain additional tax revenue from the sale of gambling products.
Unfortunately, the legal framework in place requires these operators to push for business licenses in each state individually. Typical costs to pay for licenses and lawyers are estimated in the millions, and entrenched Casino gambling operators typically provide headwinds to entrepreneurs looking to open up. On top of this, states expect high tax revenue to be generated from the operation of books leading to licenses like Draftkings’ 2019 New Hampshire operating agreement, which requires ~50% split of revenue generated from the sale of betting products to go straight to the state before taxes. As of this writing, there is no boilerplate legal framework for and operator to open up in any state, so a path forward for gamblers to place bets in many states remains hindered, or non-existant.
The rise of blockchain technologies since it’s inception, has garnered many opinions about what the technology represents. This document will stick to first principles: blockchain technologies are merely another way to coordinate information using electrical devices. Interestingly, the past 20 years has led to almost everything of value being coordinated by information using electrical devices. Readers of this document may be reminded of a world without cell-phones where a visit to a new city required paper maps, pay-phones, and a trip to a local tavern to ask natives where the nearest hotel is. Also a reminder that the largest companies in the world, now exclusively exist to store, process, transfer, and analyze the information from these electrical devices. There is no debate, the information has value, and there is something special about the way blockchains store and process this information.