March 2024

SX Network

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The sports betting industry’s annual revenue was over USD100bn in 2023 and is growing at over 10% per year. It is a sizable and growing industry.

It is also a simple business with the leading platforms taxing a two-sided market. This is a vertical that is destined for disruption in the age of blockchains and peer-to-peer transactions. This month we are going to dive into SX Network, one of our portfolio companies in the digital asset funds. We will explain how betting platforms on SX are able to beat the odds of centralised sports books and what it will take for the platform to become a dominant player in the industry.

Sports betting has a long history, tracing back thousands of years. The Greeks introduced formal sports betting to the ancient Olympics, and the Romans legalized bets on gladiator games. At its core, it is a simple business. The bookmaker makes money from a fee or commission (colloquially known as the “vig”, short for vigorish) charged for taking a bet. The vig is built into the odds offered on a particular event. For example, in a simple bet like a coin toss, the true odds of either outcome (heads or tails) are even, or 1:1. However, a sportsbook might offer odds of -110 on both heads and tails. This means that a bettor would need to wager USD110 to win USD100. The extra USD10 is the vig.

The problem with vig is that it is an unnecessary tax on the sports bettor. The nature of online markets is that we can pool significantly large numbers of people together. As a result, both sides of a market are present and, with the advent of blockchain technology, can trade bets directly against each other in a peer-to-peer setting. When a bettor enters an online bookkeeper, they are trading against the house. To make profits, the house offers worse odds than the free market would dictate. This is as pure a financial market as you can imagine and is the perfect use case for crypto to step in and offer a peer-to-peer experience and cut out the middleman.

SX Network is a sovereign blockchain that hosts sports betting applications, the primary one being SX Bet. Today, SX Bet is the leading blockchain sports betting platform by volume across all blockchains. It has processed over USD430m in transactions to date. It is a betting exchange and not a traditional bookmaker. As an exchange, it allows bettors to bet against each other, rather than against the house. This makes it a peer-to-peer model where users can act as either bettors or bookmakers.

There are several advantages that SX Bet has over traditional bookmakers:

  1. Odds and fees: on a betting exchange, odds are determined by market forces and driven by users who can take either side of a bet. SX Bet currently takes no fees on bets placed resulting in the platform often offering the best odds in the world.
  2. Fairness: many traditional bookmakers will restrict or ban successful bettors as they harm bookmaker profits. There are no restrictions on blockchain based systems like SX as:
    1. there is no need to restrict winning bettors and
    2. the system is permissionless, meaning that access to the Internet is all that is required to access the SX Network smart contracts.
  3. Transparency: every transaction can be seen on-chain making the market entirely transparent. This is not the case on centralized bookmaker websites, where betting volumes and bookmaker activities are unknown and opaque, resulting in a lack of accountability.
  4. Asset security: the SX Bet application is non-custodial, meaning that users hold assets in their own wallets and are paid out from bets directly to their crypto wallets. There is no risk of a centralized platform stealing funds or blocking withdrawals as the platform never has access to funds in the first place.

In terms of blockchain peer-to-peer betting models, SX is competing against other platforms. Of late several projects have launched that have opted for a “house pool” model instead of an exchange model. The house pool model (sometimes referred to as an AMM or automated market maker) is where LPs put capital into a pool and the pool of funds pays out bettors based on oracle feeds that define the winner and loser of a bet. The SX team explored this innovative model in 2021 but decided against it.

The problem with the house pool model is that as the pool gets bigger, bettors can put on larger bets. This then encourages what is known as “toxic flow” to start participating in the pool. These are bettors that consistently win based on knowledge advantages or the use of arbitrage and statistical methods. Having these bettors participating in a house pool will make the pool lose more often and will worsen the betting odds that are available.

House pools are gaining popularity due to their novel nature. However, it seems unlikely that these platforms will end up as the global liquidity layer for betting. The SX team has opted instead to remain with an exchange model, where bettors directly bet against each other at odds defined by the bettors, rather than being able to pull winning bets from a pool of capital. As an analogy to the DeFi space, GMX is an AMM model for perpetual futures, whereas dYdX is an exchange. Both platforms are successful, but dYdX does more volume, is far more scalable and had to build out its own chain to scale. We see the same dynamics playing out in the sports betting market, with the SX Network infrastructure far better suited to scale and provide the best odds in the industry.

In addition to its betting advantages, the SX Network is a community owned platform. Traditional sports betting platforms are not owned by their users and are under centralized control. Conversely, SX token holders are the owners of the platform and can actively participate in the decision-making process through governance proposals. By staking SX tokens, users earn staking rewards and are distributed any fees that the platform makes. In addition, stakers can vote on governance decisions and so can shape the direction that the platform goes in.

In terms of the SX roadmap, there are several exciting developments scheduled for 2024. Within the next couple of months, SX will go “cross-chain” meaning that the team will replicate their smart contracts on a number of alternative blockchains including Arbitrum (a layer-2 blockchain on Ethereum) and Berachain (a highly anticipated new platform soon to launch). This will pull in additional liquidity from users on these chains and this liquidity will be shared across the different chains through a novel liquidity sharing mechanism that the SX team has developed.

The core team and SX ecosystem also have several new products set to launch this year. LiquiStake is bringing liquid staking to the SX Network, meaning that SX holders can stake their tokens and in return receive a liquid token that represents this staked token. This gives liquidity to stakers and has been heavily utilized in alternative ecosystems. Another exciting new product is SX Edge Alerts. This is a data platform that uses the open-source data of the SX Network to find positive expected value bets and arbitrage bets that are available on SX Bet. Such a data service is not only a source of alpha for users on SX but helps the SX betting market become more efficient. This type of service simply is not available on traditional betting sites as the data is private and owned by the bookmaker. Innovations like this will be hugely disruptive to centralised platforms and will drive sophisticated bettors to SX Bet.

The SX Network provides a layer of liquidity not just for SX Bet, but also for other applications that may want to operate on the SX Network. As an investment vertical, we have high conviction in web3 sports betting and have recently made an investment into BoxBet, another crypto sports betting application. BoxBet started life as a Telegram bot and is now expanding to a web-based platform. Users can bet on a variety of sports, participate in the platform's liquidity pool for yield generation, and benefit from revenue sharing through token buyback and burn mechanisms. The team is extremely experienced and the platform has the ability to source liquidity from a range of sources, including from SX Network. Over time, we envisage SX Network complementing many such applications, resulting in an ecosystem of highly successful sports betting apps.

CMCC Global has been supporting the SX team since 2021. We have been increasing our position over the last 2 years and two weeks ago we participated in a bridge funding round alongside Draper Dragon and CMS through our digital asset funds (Fund 4 and Fund 3B). Other investors in SX include notable Web3 investors including Hack VC and Nascent, as well as sports betting veterans such as Josh Hannah, the founder of BetFair. We have a deep conviction in the team which is purpose driven and obsesses over sports betting, platform design and driving innovation in the industry. Many of SX’s users are professional sports bettors, which is evidence of the platform’s success in providing the best odds in the world.

We are excited to continue supporting this stellar team and to watch them as they look to further their mission of eliminating the vig in sports betting while also drastically increasing fairness and transparency by using the power of the blockchain. In the purest of financial markets, efficiency will win out and legacy players will have no way to compete against decentralized networks that favour users over the profit seeking, rent abstracting bookmakers. SX for the win.