Episode 8 — A conversation with Matt Smith, Research/Engineering Architect at Spring Labs about the pros and cons of crypto prediction markets and some of the controversial betting taking place on these platforms, including assassination markets.


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Host:
Chitra Ragavan
Chief Strategy Officer
Gem

Guest:
Matt Smith
Research/Engineering Architect
Spring Labs

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As final preparations get underway at the Mercedes-Benz stadium in Atlanta for the Patriots vs. Rams Super Bowl showdown this Sunday, many football fans are not just planning their party menu of chili, nachos and cold kegs of ale. They’re also busy placing bets, both legally and illegally, on the outcome of the game (The New England Patriots are favored to win the coveted Lombardi Trophy).

An estimated 100 million fans or more will tune in globally to watch the game. According to a report by David Purdum and Ben Fawkes of ESPN, in the two week lead-up, “More money will be bet on Super Bowl LIII than any other single game in American sports.”

And fans are not just betting on the big stuff — like who will win the trophy. Virtually every aspect of the game is at play through smaller “proposition wagers” or “prop bets” as they are called. This includes whether President Donald Trump will be in attendance, how many times he will tweet, which team will win the coin toss, how long Gladys Knight’s national anthem will run, even what color Gatorade will be thrown on the winning team.

For sports bookies, though these prop bets by casual investors are not as profitable as the big money main bets, since they are not deeply data driven, they are incredibly popular in terms of bet counts. “Betting on the coin toss is the American way,” David Mason, BetOnline.ag’s sportsbook brand manager, told Yahoo!Sports.

The Super Bowl is the most bet sports event of the year. Indeed, last year, just in Nevada alone — long the patron saint of gambling in America — the “handle” or amount wagered in Super Bowl bets amounted to more than $150 million dollars. And of course, it goes without saying that you can even bet on the amount of money that will be bet on the Super Bowl!

By gaming every inch of the Super Bowl, football fans are engaged in an activity as American as apple pie and as old as humanity, dating all the way to the Paleolithic era. According to various reports and historical accounts, the ancient Chinese were playing games of chance going back to 2300 BCE. The first dice excavated from an Egyptian tomb can be dated to 3000 BCE. In Greece, the first mention of dice occurred in 500 BCE. And we all know that in Greek mythology, Zeus, Hades, and Poseidon casually carved up the universe into three parts with a mere throw of the dice. Greek gods were known to get away with that level of machismo. The first playing cards popped up in China in the 9th century. And the first casinos showed up in Italy in the 17th century. The first regulated betting salon, the Ridotto, was set up in Venice, Italy in 1638, paving the way for casinos to proliferate in Europe in the 19th century. And so on.

Despite their well-documented gluttonous and sinful lifestyles, the Romans banned all forms of gambling, including dice games, according to reports. But of course the rank and file citizenry found a creative workaround to circumvent the prohibition on betting with cash — they just switched to chips.

Here in America, lawmakers and sports team owners have traditionally been more in the Roman court, so to speak, than with the Greeks. In 1910, the United States imposed a nationwide ban on gaming. It was only a decade later that horse racing was legalized. But gambling on sports has until recently been illegal in all states except Nevada, where casinos opened in 1931 in the wake of the Wall Street crash and the Great Depression as a means to bring revenues into the state.

For decades, most sports team owners have been resistant to blessing any and all forms of sports betting because of the fear that corruption would ruin the integrity of the game. And most state regulators long supported that view.

Indeed, in 1992, Congress passed a federal law banning sports gambling in all but four states which had some prior form of gambling (the grandfathered states were Nevada, Oregon, Delaware, and Montana). The law, called the Professional and Amateur Sports Protection Act (PASPA), is more commonly referred to as The Bradley Act, named after former New Jersey Senator and legendary NBA star, Bill Bradley.

Sports gaming remained illegal in the other 46 states.

But using vice revenues to offset bad governance has usually proven irresistible to lawmakers. In 2010, New Jersey Governor Chris Christie pushed through a referendum allowing betting at casinos and racetracks. In 2014, the National Collegiate Athletic Association (N.C.A.A) and major sports leagues filed a lawsuit challenging the referendum alleging it violated The Bradley Act. The lawsuit made it all the way to the Supreme Court, which, last May, struck down the 1992 law as unconstitutional. In its 6-3 Murphy v. N.C.A.A decision, the Court did not legalize sports betting. Rather it ruled that The Bradley Act violated the 10th Amendment to the U.S. Constitution in telling states what to do with sports betting.

In the wake of the ruling, there are now a total of six states that allow legal sports betting. Last October, New Mexico also began to dip its toes into sports wagering but only on a tribal property. It’s illegal elsewhere in the state.

This week, New York became the latest state to take a big step towards blessing sports betting at four brick and mortar upstate casinos (online gambling is still a no) with a tentative nod from the New York State Gaming Commission.

There has been a ton of great analysis about the implications of the Court’s ruling on sports betting including this great piece of reporting in the New York Times this week by Bruce Schoenfeld who profiled Washington DC-based billionaire Ted Leonsis, long a visionary proponent of sports betting, investor in major lucrative online gambling forums, and owner of numerous sports teams including the Washington Capitals, winner of the 2018 National Hockey League’s Stanley Cup.

Another new factor that is pushing gaming into the stratosphere is the explosion of mobile phones and the resulting skyrocketing of online gaming which puts betting literally at your fingertips on demand. The advent of blockchain technology and cryptocurrency companies that are building cutting-edge prediction markets could transform the face of all gaming, including in sports.

Prediction markets are exchange-traded markets created to predict the probability of the outcome of a future unknown event. It’s based on the notion of the “Wisdom of Crowds,” which essentially says that the collective opinion of a group of people is more accurate than that of a single individual. The earliest form of prediction markets was bets placed on political outcomes, dating back to 1884. One example often cited was a prediction in 1503 on who would be the next pope.

Now prediction markets are undergoing a makeover thanks to blockchain technology and cryptocurrency and it’s already impacting the gaming industry, including sports betting although the effect is being felt in all aspects of gaming including politics.

I sat down with Matt Smith, my former colleague and crypto brainiac, who currently is Research and Engineering Architect at Spring Labs, to talk about all the ways in which this transformation, some good, some bad, some pretty dark stuff, is taking place.

The good stuff is all the accuracy and  transparency and accountability that blockchain technology, which essentially is an indelible ledger, can bring to the often shady online gambling industry, where even key data such as payouts or winnings or results is often hidden or obfuscated.

“It’s a really easy way to interact with the crypto ecosystem and add value to a network and make sure that we have this really robust powerful accurate way of figuring out what happens,” says Matt, “Which we know is important in this age of questionable facts and false truths.”

Obviously, not much can be done when bad outcomes result from sheer bad refereeing such as in the recent NFC L.A. Rams v. New Orleans Saints Championship game when not one but two referees blew a call on a clear infraction by Rams cornerback Nickell Robey-Coleman who “struck Saints wide receiver Tommylee Lewis in the head before a pass intended for him arrived,” according to a 247Sports.com report. One New Jersey sports book actually did the right thing and said they would refund bets placed on the Saints as a “Good Karma payout,” the report said, since the referees admitted they had indeed blown it.

“The cool thing about these prediction markets, when they run on this blockchain,” Matt says, “Is that there are financial incentives to make sure that everyone that’s participating agrees this is actually what happens. It was actually 95 degrees that day. Trump actually won the election.”

But even blockchain technology can’t prevent bad human calls, as Matt illustrates, using the recent controversy over the wording of a prediction market around who would win the 2018 midterm elections which resulted in a highly disputed decision. And how will these types of disputes get resolved given the permanent blockchain ledger on which these decisions get recorded?

Since blockchain prediction markets are open, decentralized platforms,  they create massive global markets for online betting on sports or other events. And they are tamper-proof and resistant to censorship or jurisdictional regulation. However there are both positive and negative aspects of that kind of powerful autonomy as Matt vividly describes in looking at some of the strange prediction markets that are out there, including the so-called assassination markets that predict the probability of political or celebrity assassinations.

“And it allows you to basically put an open bounty, a public open bounty, on someone’s head from overseas, and anonymously,” Matt says. “It’s really scary that you can do that.”

Matt adds that because these prediction markets are built on a “censorship-free” platform, there’s no way to stop bad actors from participating.

“There’s no kill switch on this, so you can’t shut it down. It’s just there so you can use it,” says Matt. “What you can do is go after the people that interact with it. I think we will definitely see this getting negotiated in court and in the court of public opinion.”

And already, regulators are eyeballing the prediction market Augur, according to a July 2019 report in Bloomberg. The assassination contracts are obviously a point of concern. But regulators are also looking at the core philosophy behind the platform, the Bloomberg story says. “. . . creating a way to bet on the value of goods in the future is basically the definition of a type of derivative known as a binary option,” says reporter Matthew Leising, “Yet Augur hasn’t sought approval from the Commodity Futures Trading Commission to list such contracts.”

One way or another, whether through traditional or blockchain-based platforms, it’s clear that cryptocurrency has joined the discussion on sport betting and other types of gaming. As evidenced by the Super Bowl sports books this year, which even feature the following crypto proposition wager:

“What will happen to the price of Bitcoin during the Super Bowl?”

Bitcoin price is more at game’s end     -130

Bitcoin price is less at game’s end       -110

Essentially, the odds say the price of bitcoin (BTC) will drop during Super Bowl. And Sunday is historically the best day to buy BTC, according to the SportsBettingDime online publication.

So maybe we can make a final parting prop bet that at least a few crypto investors will spend some time this Sunday sipping a cold beer or two and checking out bitcoin prices during the award-winning commercials, in case those sports books predictions come true.

And what are the odds of that?

Don’t forget to join us next week for a special edition of Running with Unicorns, with not one but two amazing guests, crypto influencers Calley Nye, CEO and Founder of Syren.io and Alison Burger, Co-Founder of Women of Crypto. We have a rip-roaring discussion about crypto security practices and how to keep your cryptocurrency safe.

Topics Covered in This Episode:

  • Sports gambling is very much in the news
  • Brief history of sports gambling laws in the United States
  • 2018 Supreme Court decision giving power to states on sports gambling
  • Will online sports gambling be next step of legalizing gambling?
  • How traditional prediction markets work
  • Prediction markets and how they utilize the “wisdom of crowds”
  • Different formulations of prediction markets
  • Crypto prediction market as a new twist on an age-old idea
  • Benefits of decentralized prediction markets – better security and censorship resistance, global pool of liquidity
  • Could shape future of online sports gambling
  • Core innovation – gambling good way to bootstrap new crypto networks, uncover information otherwise hidden, inject data verifiably into the blockchain ecosystem
  • NJ Refund of bets example
  • How these platforms actually work? How do you place bets and create markets?
  • How censorship resistant decentralized betting platforms such as Augur work, interacting directly with the markets, using the blockchain
  • On killing the kill switch of this network and what that means
  • On assassination markets and the potential implications of that
  • On political bad actors and how they could manipulate assassination markets
  • Where all this is heading, maybe to the courts
  • How dispute resolution works on these platforms
  • Some recent disputes such as the recent US midterm elections and baseball and how they are being resolved
  • Closing thoughts

About Your Host, Chitra Ragavan

A little background about me — I’m the Chief Strategy Officer at Gem, a Los Angeles-based crypto portfolio startup. Prior to Gem, I was Senior Counselor to the CEO of Palantir Technologies. Before entering the software startup world as advisor to CEOs, I was a long-time journalist at WTTW/Public Television in Chicago, National Public Radio (NPR) and U.S. News & World Report Magazine (U.S. News).

My goal is to provide independent and thoughtful analysis of the events and news shaping the industry.

By way of full disclosure, I am a crypto investor, and I own a small amount of Augur. If we ever mention a specific cryptocurrency in the context of a discussion, I will fully disclose my investments, if any, in that currency and expect the same from my guests. I’ll avoid any and all conflicts of interest in the course of these discussions.

You can learn more about me on LinkedIn, my website, or my Instagram.

Enjoy your crypto journey, unicorns!

Chitra Ragavan