A low-key newspaper even contracts the odds for peer-to-peer sports betting on Bitcoin. Bettors have a fairer chance when sports betting loses its edge.
Chris Stewart is the CEO and co-founder of Overbitsa derivatives platform settled in bitcoins.
Discrete Log Contracts (DLC) are a way to make peer-to-peer bets directly on Bitcoin. You can make these contracts dependent on an oracle’s attestation of a real-world event. This real-world event could be the winner of a presidential election, the BTC/USD price on a cryptocurrency exchange, or the outcome of a sporting event.
A simple example is betting on the outcome of the Super Bowl. The Super Bowl this year was between the Cincinnati Bengals and the Los Angeles Rams. With discrete log contracts, Alice and Bob can bet on the Super Bowl by making a bitcoin transaction between them. The funds locked in the bitcoin transaction are released when an oracle attests to the Super Bowl outcome.
This article is going to explain why discrete log contracts add value to the existing sports betting ecosystem by providing sports bettors with the best possible odds for their bet without moving the lines.
Understanding “La Vig”
The vigorish (“vig” for short), also known as the “edge” or the “house edge”, is a mathematical advantage introduced by sports betting to ensure that they will always profit in the long run. When giving odds to customers, the bookmaker will introduce a statistical bias for a percentage of profit that they wish to capture regardless of the outcome of the underlying game. This is why sports betting is so profitable: if they run their business with proper risk management, they can’t lose!
The suckers in this example are the sports betting customers. They are mathematically disadvantaged from the start. If they continue to participate in bets where this mathematical bias is built in against them, they are guaranteed to lose unless they have some sort of other advantage.
With bitcoin and discrete log contracts, we can eliminate vig and build bets with fair odds. This increases the profitability of a sports bettor in the long run.
Recreational versus professional sports betting
As mentioned above, if you bet against a bookmaker, you are guaranteed to lose due to the mathematical bias introduced against you, unless you have an advantage. An advantage simply means that you have an advantage in sports betting.
Some examples of developing an edge are computer systems that run statistical analysis to calculate better odds than sports betting, or maybe you have contacts that give you information about the event that is not public. . (The latter is frowned upon.) Recreational sportsbooks look down on customers who have an advantage over them because it means they will lose money despite the vig.
There are two distinct categories of sports betting, and they treat customers who have an edge differently.
Recreational sports betting outfits are what you see on your TV at sporting events. Their goal is to attract retail customer flows. They make money by giving these retail customers terrible odds (the vig). Retail sports bettors are not sensitive to the price of odds, they want to enjoy the pleasure of betting rather than making money.
For anyone with an advantage, the retail bookmaker will kick them out. They don’t try to compete by calculating the best possible odds, they want to attract as many uninformed bettors as possible.
Many profitable sports bettors are kicked off the recreation books. This is because the core skill of a recreational sportsbook is marketing, being no smarter than bettors using their book. As books get bigger, they have to get smarter. Since they take the opposite side of every transaction on the platform, sportsbooks must have an edge over their customers or they will lose money.
Market makers set the line to be as competitive as possible. If they set this line to be as competitive as possible, they will organically attract volume from punters who have a view on the outcome of the game. They still have to introduce vig to ensure their operation is profitable, giving thereby giving their customers unfair odds.
Market makers thrive on the flow of bets. Their business model is based on analyzing the flow of bets entering their business. This is very similar to how companies like Citadel work in traditional finance. Citadel pays retail brokers like Robinhood for their retail feed. The reason they do this is to get valuable information on the market.
This information gives market makers a leg up on other bettors on the platform because they know who is placing which bets. They can follow profitable bettors on their platform and use their data and adjust the lines they offer to the rest of the book. This improves the profitability of the market maker.
Market maker customers are much more technically sophisticated than recreational sports betting and are more sensitive to vig prices because they understand that they are at a mathematical disadvantage in sports betting. Since these clients are more price sensitive, the market maker is compensated with a small vig plus valuable market information.
Customers of market makers are an ideal customer for discrete log contracts because they appreciate the fair odds, privacy offered by DLCs, and immediate payouts in the form of bitcoin. Since DLCs are not registered on a centralized platform, placing large bets will not move the betting markets. This is very similar to traditional finance where two entities agree to trade a stock or derivative over the counter (OTC). The advantages of OTC transactions are that you can exchange large amounts of the financial product, and you can do so privately.
Size of bets
There are sports bettors around the world who want to bet a large amount of money. This is exemplified in the cult classic “Two for the Money” starring Matthew McConaughey.
In this clip, “Mr. Novian” is a high-end sports bettor who bets millions of dollars every game. He is constantly on the lookout for advantages provided by analysts like “John Anthony” who is played by Matthew McConaughey .
As mentioned earlier in this article, recreational sports betting does not like customers who have an advantage over them. This can make sports betting unprofitable. High-end sports bettors pose two problems for recreational sports betting:
- They have the resources to develop edges.
- They have the capital to take advantage.
Paradoxically, market makers like informed bettors because of the remuneration they receive in the form of information. However, even sophisticated market makers can get crushed by large, sophisticated bettors.
For this reason, sportsbooks must protect themselves against large, highly sophisticated sports bettors by implementing “per-click limits”. This means that if Mr. Novian wanted to bet $1,000,000, he would have to divide it into ten bets of $100,000 each.
To make things even more unfair to Mr. Novian, the bookmaker may adjust the lines after every $100,000 bet he places so the book can guarantee he is profitable. This means that Mr. Novian will have increasingly bad odds as he places his $1,000,000 bet.
With bitcoins and discrete log contracts, Mr. Novian can bet any size he wants. There is no “per click” limit. As long as he can find a match for his bet, he can get consistent odds on the $1,000,000 he wants to bet. This greatly improves Mr. Novian’s odds for his sports betting.
Bitcoin has already affected the sports betting industry. It’s the easiest way to send money to and from any bookmaker, regardless of your location. The next revolution for bitcoin sports betting is discrete log contracts.
The benefits of DLCs and bitcoin are:
- Fair odds for both sides of the bet (removal of vig). It’s a win/win for each side of the bet.
- Payments guaranteed via the Bitcoin blockchain. (No more trusting “Bobby the Bookie” around the corner.)
- Unlimited size and no “per click” limit for big sports bettors.
- Confidentiality/anonymity. Your bet is not placed in a public market and does not affect the odds.
Thanks to the critical contributors of btctldr.com and Play 4 Advantage LLC for an overview of the sports betting industry.
This is a guest post by Chris Stewart. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.