Betting markets are highly centralized environments. As of today, the access to any betting platform is managed by a government, a single party or a specific institution. With the blockchain technology emerging in all kinds of fields, the betting sector does not remain untouched. Some startups are already working in this field and have live applications. In this blog post, I would like to give you a general overview of this blockchain based application: are they needed or not? Do they make sense or not?
At the beginning stands the problem and the question, what does the blockchain application solve? For those of you who watch my YouTube Videos, I may sound repetitive, but this is a crucial point to understand. Before diving into too much detail when informing yourself about a new blockchain based application ask yourself:
“What real-world problem is this application solving?”
Too many projects argue to be more efficient regarding speed and cost, but in reality, a decentralized solution will never be favorable in this field if it is compared to a centralized solution. Moreover, if this is the only reason why an application exists be careful because the use case is questionable.
After those initial thoughts let us dive into the construction of such an application. A blockchain based betting platform could be either created on a new blockchain with the only purpose running the betting platform, or the application could be built on top of an already existing solution. This would then classify as a layer on top of a blockchain. The first blockchain which comes to mind and which is also used in today’s application is the usage of Ethereum’s ERC20 tokens. Such tokens can easily be used to create smart contracts which then handle the terms and conditions of the particular bet.
Okay, so step one is relatively easy. Creating or using an already existing blockchain application and building the betting platform on top. The second step is much harder and not so simple to solve.
When setting up a bet, we usually have two parties or more betting in favor of or against a specific outcome. Those participants are now betting on the outcome of for example the presidential elections. The terms and conditions of the bet can quickly be put to record in a blockchain. The contract defines what happens if Person A/B wins or loose. Based on the outcome of the bet, funds would then be distributed accordingly.
Here comes the focal point; How to connect a blockchain to the real world?
This is a critical point. If a betting market is set up decentralized and the outcome of the bet is a real-world event how does the blockchain knows what the result is? A key element of this connection is, that the information cannot or should not come from a central party or entity. This would otherwise make the whole application pointless because this would create an obvious backdoor for fraudulent behavior.
The solution to this problem is the usage of so-called Oracles. Oracles can be defined as a decentralized reality check. In short, an oracle is set up with a large enough group of people where no one has the information who else is participating in the Oracle. Furthermore, the reply to the question (in our case who won the presidential elections) is time restricted. This means the participants have enough time to reply to the question but not too much time. Usually, there is an incentive for the people participating in this voting system but only if the people who vote are on the side of the majority. The idea is that if the group is large enough, the majority will give the correct answer furthermore the incentive influences the participants to give the correct answer.
Coming now to some pros and cons of a decentralized betting platform. Of course, such a platform would qualify to be censorship resistant, since no central organization controls the platform. This means that basically every bet imaginable could be set-up. What problems this brings will be discussed in a second. A second pro argument is that a decentralized platform has very low or no entry barrier. So everybody can participate. The question with this argument however is, who are the people who need access to such a decentralized betting platform because usually, a centralized betting platform would not deny access (other than to questionable individuals). Furthermore, why should someone who already has access to a centralized system switch to a decentralized one? What exact benefit does someone get from this? Those questions once again emphasize that the use case of such a blockchain application needs to be crystal clear in order to bring real value to the table.
Now let’s talk about the first introduced benefit, the censorship resistance. With such an open and free environment you can bet on almost everything, and this includes the death of a person, for example, a president. This is precisely what happened this year, that’s why the topic of an open betting environment is heavily discussed in the media and press.
One argument the media and when generally discussing this with a discussion partner is brought up is the buzzword ‘unethical.’ Especially when a bet is associated with human lives. Within this context, I would like to make some distinctions. First of all, mainly all insurance companies, pharmaceutical institutions or hospitals are calculating their economic profit utilizing death statistics. So they use some historically collected data and combine that with a current assessment of the situation to make a bet on the outcome with the goal of a financial profit. So by generalizing and saying this is unethical, just because such bets are possible, is incorrect in my mind.
However, there is a flipside to this discussion. I also believe that such bets can become unethical. They are unethical when the outcome of a bet is actively steered in one direction. Let us say the financial gain or the loss would be so significant for a group of people or an institution participating in this bet, that the outcome is tried to be influenced. Now we have an unethical situation because such a bet could put the life of a person actively at risk. So this is an essential point which needs consideration and is quite challenging because how do you create censorship resistance and at the same time do not allow unethical behavior? When dealt with a centralized betting market there are no questions about this topic, but in a decentralized environment, it is very unclear. Even though a blockchain based betting market makes sense and has pro arguments, at the same time difficult challenges and questions exist for which answers need to be found.
In this post, we talked about the way to set up an application; also about the connection of the blockchain to the outside world through oracles and the general mechanism behind it. Some pros and cons have been discussed, and a lot of open question remains when thinking about decentralized betting platforms. Current projects will surely work on some of those questions, and new projects will be started. I think with a solid use case and a flawless execution a decentralized betting application could bring a lot to the table. I am curious what the future will bring. However, for now, I hope you have enjoyed this blog post.
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Dr. Julian Hosp is the co-founder of TenX, blockchain expert in numerous working groups of the EU parliament, TEDx speaker and bestselling author of multiple books. His website is: www.julianhosp.com