History shows us that humans enjoy venturing past the limits of safety. We like risk and the idea of finding value in the unknown, especially when there is an economic incentive in doing so. Think the Silk Road, European explorers, etc. We have even built entire markets around this, some more risk-adjusted than others (equity markets, gambling — lotteries, casinos, etc.).
Let’s zoom into gambling.
Gambling can be traced back to 2300 BC in “Ancient China where tiles were unearthed which appeared to have been used for a rudimentary game of chance.” This is still very much present in our current day in the form of lottery tickets, casinos, online gambling, etc. Yet at the end of the day, ‘the casino always wins’ because it is a centralized, money-making business. But does it need to be like this?
Gambling in Crypto: Surface Level
Ape-ing into shitcoins is one example, but it is typically not very risk-adjusted as seen in countless examples of rug-pulls, exploits, etc. This strategy works best with asymmetric information which is inherently limited to a select few. Another example is trading with leverage. On GMX.io you can get up to 30x leverage on ETH, BTC, LINK and UNI. DyDx is another example of this. However, as Munger says, there are three ways to go broke: ‘liquor, ladies and leverage’.
Gambling in Crypto: Below the Surface
Despite these examples, there are some unique, arguably paradigm-shifting platforms being built on Web3 that revolutionize gambling by removing the ‘casino’ or rather the centralized entity that has interest in you losing. In my perspective, this development is mainly concentrated in two areas: Lossless Lotteries and Prediction Markets.
Lossless Lotteries? It must be a scam.
You mean to tell me that I can participate in a lottery without losing my principal?
Yes, that is exactly what has been created by utilizing the blooming DeFi industry as a backbone for it. Protocols like PoolTogether on Ethereum, Ink Protocol on Terra (the list goes on):
Collect deposits (typically in stablecoins) from new-gen gamblers, forming a large pool of liquidity.
This pool is then yield-farmed (deposited into lending protocols, for example) to earn interest on users’ principals.
After sufficient yield accumulates, the pool is dissolved and principals are paid back in full while a lucky, select few ‘win’ the interest that the entire pool generated.
By leveraging network effects and pooled deposits, these protocols are able to create lossless lotteries resulting in (as seen on PoolTogether) $145k in weekly prizes.
This has even been extended to lossless investing in crypto startups through Pylon Protocol on Terra. A user simply deposits their principal into a pool which is yield farmed and rather than being paid the yield in stablecoins, they are paid in the governance token of a specific project. This democratizes seed-stage investing exposure while being principal-protected.
What is the catch?
There really seems to be none besides the potential for exploits/smart contract risk. These platforms are typically audited, open-source, run on public blockchains and, as is the case for PoolTogether, fully decentralized and autonomous. This means that there is no casino overlord who wants your money but rather the thousands of users of the platform are also the people who govern it (thank you ownership economy) and the platform runs autonomously with smart contracts.
What does this mean?
I strongly believe that this will heavily disrupt the global lottery market (valued at US$ 336.33 billion in 2019) and the current venture capital market (valued at US$ 211.3 billion in 2021).
Prediction Markets
How do you monetize strong conviction in a specific event taking (or not taking) place? Currently, you are limited to making a bet with your friends, sports betting or trading futures, etc. However, what if I wanted to monetize a more trivial bet, like what the floor price of Bored Apes will be in a month from now, or whether Trump will launch his social media platform at the end of February? Enter Polymarket.
This platform allows users to ‘trade futures’ on the most trivial to the biggest real world events. Essentially, you can buy a YES or a NO on a specific event happening. Initially, both choices are priced at $0.50 each but increased demand for one choice raises its price and decreases the price of the alternative. Throughout this entire process, YES and NO always add up to $1.
While long-term legality may be a concern, this platform model is completely revolutionizing betting. Although you do not get your principal back in full, there is still no calculated centralized force profiting off your incompetence since it is P2P.
If we dig deeper we discover that this platform can be used for something bigger than mere betting. Assuming that liquidity in the different pools on Polymarket continues growing, the platform can be used to hedge against certain events that involve you as a stakeholder. For example, if I own stock in Truth Social, which has announced that it will launch in February, I can hedge my position by betting NO to it releasing in February to cover potential downward price action of the stock if its release is delayed.
But I digress…
What does this all mean?
What I am illustrating is a new direction that the world is heading in the niche of gambling, lottery and betting. These industries are becoming a lot more risk-adjusted and colorful and to say that I am excited to see where all this goes in a few years time is an understatement.