🚢SX Business Strategy
Last updated
Last updated
We can classify the sports betting world based on two dimensions: whether they are low vig or high vig, and whether they are crypto-native or fiat-based. Using these two dimensions give us roughly four quadrants:
Fiat betting exchanges & asian bookmakers
Fiat sportsbooks
Crypto sportsbooks
Crypto betting exchanges (i.e. SX)
We will be breaking down each of the first three quadrants and how it relates to SX strategy.
Fiat betting exchanges are a highly concentrated industry dominated by the industry pioneer - Betfair - with a few other exchanges of note (Matchbook, Smarkets, Betdaq). These are centralized peer-to-peer betting exchanges that deal exclusively in fiat. They compete on liquidity and activity. They are highly defensible with pricing power at scale. Betfair has a massive network of market makers and bettors, and has been to able to increase fees over time. They currently charge a headline fee of 5% on winnings, with some bettors subject to a dreaded premium charge (equal to 60% of monthly winnings).
We’ve included Asian bookmakers into this quadrant as well as they operate similarly to betting exchange (open limits, no banning of bettors), and compete on vig. The main difference between the two is that Asian bookmakers internalize market pricing (i.e. they have their own trading team), instead of externalizing it like a betting exchange. This is also a relatively concentrated industry with Pinnacle being the market leader, and then a host of other secondary books. Pinnacle is a bit of a hybrid as they sometimes accept crypto deposits in certain jurisdictions and operate on a pure fiat-basis in others.
Scale: Betting exchanges and asian bookmakers operate on a low-margin, high-turnover model. They are effectively the Walmart/Costcos of betting. Their relatively low margin model typically means they have far less money available for mass marketing and promotions; they instead rely on a small number of large VIPs and syndicates to drive most of their activity. While this may sound like a bad business model, they have actually been to shown to have extremely high defensibility. The largest gambling company in the world - Flutter - started as a betting exchange (i.e. Betfair). This part of the industry is subject to massive economies of scale and network effects, meaning that many of the winners in this space were founded decades ago, with Flutter/Betfair (founded in 2000) and Pinnacle (founded in 1998) leading the pack.
Market Coverage: While their sheer scale and penetration is their biggest advantage by far, these platforms also have big leads in sports coverage and live betting coverage. As SX continues to scale its user base and product, these advantages should fade over time. However, as of now, both platforms are far ahead.
Trust: Both businesses have been around for decades, have processed tens of billions of dollars in bets, and built-up highly trustworthy brands.
Fees/Liquidity: Betfair has increasingly ratcheted up costs on their user base over time, with relatively high headline commissions (5% of winnings) and introduction of premium charges (up to 60% of your monthly PnL). This represents the greatest source of differentiation between Betfair and SX at the moment. At sufficient scale, betting on SX should be far more economical than using Betfair. More importantly, there is an ongoing sense of frustration between Betfair users and Betfair. Many users rightly feel that the business is focused purely on shareholder maximization; and have little trust in management not to increase fees as soon as possible. Either way, SX should be able to undercut both over time with superior liquidity and odds.
Access to Funds: Betfair (and Pinnacle), of course, also centralized. This means that it’s far more difficult to move funds into and out of the exchange, like you can with a non-custodial platform. They don’t have a token so there’s little alignment between the community and platform. Though this may not matter as much for more professional bettors, and is less of a tailwind for SX now that bet mining has been turned off.
Developer Ecoystem: As for-profit, closed-sourced companies, there’s also a big angle to attack them through the creation of a third-party developer ecosystem. Open-source, blockchain-enabled products inherently come with far less platform risk for developers, and far more overall welcoming environment to developers as well.
Our strategy for winning over their users is quite simple: offer better liquidity on the most popular markets. Many of their users are highly price-sensitive and operate in small circles. By offering better liquidity and working with key opinion leaders within their networks, we have been progressively able to win them over to SX.
We have had particular success winning over Pinnacle customers as many are already familiar with crypto, focus on pre-game betting (where we thrive), and familiar with our user interface. There is space here to scale SX from our current $150m/year to +$5b/year in betting volume by simply winning more and more of these users over to SX.
Fiat sportsbooks are the platforms that most everyday consumers are most familiar with - i.e. the Fanduel, DraftKings, and Bet365s of the world. These platforms typically have little product differentiation besides user interface and design, and therefore rely heavily on branding, promotions, and advertising to distinguish themselves. At this point, almost all fiat sportsbooks are highly regulated and deal exclusively in fiat; virtually none of the mainstream books offer crypto deposits due to regulatory constraints.
These platforms typically have thousands small bettors, with the occasional VIP, and thus have a very small average bet size. To compensate, they charge high vigs (4-7% is common) and do everything possible to drive users towards the extremely high vig markets (i.e. parlays). They have huge problems with retention because their high vig model and aggressive pushing of low winning probability bets (i.e. parlays) churns through the account balances of their users relatively rapidly. To compensate, they typically have aggressive retention bonuses to keep users coming back. They typically don’t internalize market pricing or have relatively unsophisticated trading teams; they instead rely on third-party software tools or other sportsbooks for setting their odds. Almost all of them ban winning bettors and/or use stake factoring software to dynamically adjust betting limits for users based on their profitability.
Marketing: Because their model is inherently more profitable in the short-term, they can typically afford to aggressively spend on marketing to gain market share. They are also relatively undiscerning on user acquisition; they are trying to get bettors and non-bettors alike to use their platform. Many of the big companies in this space (i.e. Draftkings) are also public and have huge war chests to spend to acquire users. They are also very aggressive on promotions.
Market Coverage: Because these platforms ban/limit all winning bettors and charge high prices, they can offer far more markets to their user base. However, this wider coverage also opens them to massive arbitrage opportunities, creating incentives for winning bettors to take advantage of them. This creates a perverse dynamic where they are essentially in a constant battle to ban their most active bettors, even while spending huge amounts of money to acquire said bettors.
Ease of Use: These platforms aren’t designed for power users; they are targeting the average joe looking to place a $5 bet on a parlay. This means they typically have extremely slick user interfaces designed purely for ease of use.
Our target demographic can’t use their product: Pretty simple really. Syndicates aren’t allowed to use their product because they are typically winning bettors that place bet large bets; these are the first bettors to get flagged and limited by these companies. Arbitrage bettors can typically get away with keeping their accounts open for longer, particularly if they aren’t betting exotic prop markets.
Horrible liquidity: As soon as bettors begin to do research and/or educate themselves on how to actually win at sports betting, they realize that these sports books are not the best place to bet (besides for arbitraging) due to their high vig, banning of winning bettors, and lack of transparency.
Access to Funds: Even though this sector is more highly regulated nowadays, it can still be difficult to deposit and withdraw from fiat sports books. Due to rampant chargebacks in this industry, bettors often have to use third-party services to deposit and withdraw funds. Sports books are also custodial, and on occasion, can choose to withhold funds due to perceived “malicious” betting. It then becomes a battle to get funds out, typically requiring legal threats to get your money out.
Our key strategy for winning over users in this quadrant is to actually mostly ignore it (for now). For the most part, these bettors aren’t yet ready to use a sophisticated, low-cost product like SX. Furthermore, they typically don’t yet have experience with crypto, let alone onchain products. Their average bet size is also too small to justify the costs of using an onchain product, which has some bridging fees and gas costs to utilize.
These users also inherently want low-probability, high-potential bets (i.e. parlays), which are better served by a sportsbook with huge coverage like they have. We typically ignore these customers, until they have moved over into the fiat betting exchange segment (as it means they care about odds) or the crypto sportsbook segment (as it means they understand crypto). Over time, the pool of bettors that become educated about sports betting and/or crypto continues to increase.
Crypto sportsbooks are the fastest growing segment in the gambling world over the last few years. Stake, Rollbit, and others have gone from essentially nothing, to billions of dollars in annual revenue, in very short-order. For example, here’s Stake’s annual revenue growth, as reported by the Financial Times in 2023:
Unlike fiat sportsbooks, most crypto sportsbooks are lightly regulated and deal exclusively or primarily in crypto. These platforms typically have a mix of small and big bettors, with much more of a focus on large crypto whale VIPs. Similar to fiat sportsbooks, they typically charge high vigs (4-7% is common) and also try drive users towards the extremely high vig markets (i.e. parlays). However, most of these platforms have built-in casinos, so there’s more of a focus to drive users there as well.
They have similarly big problems with retention because their high vig model, but, because of their light touch KYC and the more adversarial environment of crypto, they typically aren’t as aggressive on using bonuses. They also don’t internalize market pricing and virtually none have their own trading teams; they instead rely on third-party software tools for setting their odds. Almost all of them ban winning bettors and/or use stake factoring software to dynamically adjust betting limits for users based on their profitability.
There’s also a much, much higher custody risk with using crypto sportsbooks; it’s highly common for them to gate withdrawals and/or outright steal deposits. This is the big motivating factor driving the development of a tiny but emerging subset of crypto sportsbooks - onchain sportsbooks (e.g. Overtime, Azuro) - that pipe in an odds feed through Chainlink.
Marketing: Because their model is inherently more profitable in the short-term, they can typically afford to aggressively spend on marketing to gain market share. However, because of the light touch KYC they employ, they are far less aggressive on promotions. Typically, the focus is on affiliate marketing deals, typically centered around Kick streamers (for casino) or crypto twitter influencers (for sports betting). They also rely heavily on major sports sponsorships to build trust around their brand.
Market Coverage: Because these platforms ban/limit all winning bettors and charge high prices, they can offer far more markets to their user base. However, this wider coverage also opens them to massive arbitrage opportunities, creating incentives for winning bettors to take advantage of them. Furthermore, as a crypto sportsbook, it is far easier for arbitrage bettors to rapidly move capital into their platforms to take advantage of these opportunities. For this reason, crypto sportsbooks typically have less market coverage and worse live betting experiences than fiat sportsbooks.
Ease of Use: Similar to fiat sportsbooks, these platforms are designed for less sophisticated users and therefore typically have slick user interfaces designed purely for ease of use.
Our target demographic really can’t use their product: Unlike fiat sportsbooks that ban or limit bettors, crypto sportsbooks often go a step further and outright steal deposits. They are able to do this because of their light-touch KYC, the latter of which is often used as justification for withholding funds. Arbitrage bettors can get away with keeping their accounts open for longer as crypto sportsbooks often are less sophisticated in their risk management processes, but it comes with much higher risk. Note: this concern is allayed with onchain sportsbooks, which are non-custodial.
Horrible liquidity: Crypto sportsbooks have similarly uncompetitive odds as fiat sportsbooks, although typically they have less available liquidity. This is a particular disadvantage of onchain sportsbooks - which often have extremely degraded liquidity and poor odds. The reason for this is simple - onchain sportsbooks can’t ban winning bettors, meaning they’re forced to adopt an asian bookmaker model of setting global limits and accepting all action. However, they are at a dramatic disadvantage compared to classic asian bookmakers for a number of reasons. First, they lack the economies of scale. Second, they have an inability to manage risk with a discretionary trading team. Lastly, and most importantly, they have no ability to manage risk based on individual bettor activity. This last point is particularly salient - asian bookmakers manage their risk using customer profiling; they adjust their liquidity based on who bets into them. Onchain sportsbooks cannot do this as it’s trivially easy for sophisticated bettors to mask their activity. We are extremely bearish onchain sportsbooks for this reason, with one important caveat - we’re bullish branded user interfaces that repackage liquidity with a surcharge. User interfaces are profit-maximizing and will repackage the liquidity that is deepest; we believe SX’s strategy of becoming the global liquidity hub will enable us to dominate this market.
Low Trust: Crypto sportsbooks aren’t seen as trustworthy. Given their track record of stealing customer funds, this brand is well-earned. A few breakout crypto sportsbooks have been able to grow their way out of this trust deficit with sponsorships, major influencers, and branding. However, the concern around getting your funds is always there, even when using the large sportsbooks like Stake, Rollbit, and Shuffle. This is often cited as one of the primary reasons that crypto-native users use SX over these crypto sportsbooks, and is a primary advantage for onchain sportsbooks as well.
Our key strategy for winning over these users is content marketing and direct outreach (through Debank and Twitter). Many users seek out onchain alternatives after getting their funds stolen by these onchain sportsbooks, which is how we’ve acquired some of our largest bettors (we call them “Rollbit refugees”). This makes SEO paramount, in addition to content targeted around these specific concerns. Being a fully doxxxed founder helps a lot with building trust here. Getting on as many podcasts and twitter spaces has been a big focus, and will likely continue to be for the foreseeable future.
Longer-term, we believe we will acquire the vast majority of these users through third-party branded interfaces. These branded interfaces will be built around specific blockchain ecosystems, memecoin communities, NFT projects, and more. Interfaces will repackage liquidity and add a surcharge, outsourcing all operations but marketing.
This is actually the current strategy of Azuro, which is the leading onchain sportsbook protocol. However, we believe they are building the proverbial car in the wrong order. We believe it’s paramount to first build the SX protocol into the leading global liquidity hub, and then have others build on-top of it. This lets the interfaces building on-top of the protocol offer competitive products while maintaining high degrees of profitability (which will be needed for the marketing). Azuro protocol’s liquidity is subpar at the moment (the reasons why are detailed above), making it extraordinarily difficult for any of the interfaces building on-top of their protocol to offer competitive products or be economically sustainable. There are other issues with Azuro’s approach that SX has solved. For example, SX’s rollout of cross-chain betting will enable interfaces to build in multi-chain support on Day 1.
