Daily Fantasy Sports does not Need Bitcoin
One of my main takeaways from 30+ hours worth of Chris Derose and Josh Unseth’s podcast “bitcoin uncensored” is that the bitcoin blockchain is not tabasco sauce – it doesn’t make everything you dump it on better. Some of the technologies we’ve reviewed here – Factom and Augur are two specifically lambasted on the show – are using blockchain to solve problems that don’t really exist or to make alternatives to centralized products that work just fine and are more efficient.
And bitcoin itself is not meant for ubiquitous use. For most transactions credit cards are cheap and easy. It is precisely when transactions stop being cheap and easy, or stop being possible at all, that bitcoin is needed. Regulatory arbitrage, circumventing harmful regulations, Derose and Unseth chant like a mantra, is the purpose for which bitcoin is best suited.
Which brings us to Daily Fantasy Sports (“DFS”). DFS has been getting beat up lately. New York Attorney General Eric Schneiderman issued a cease and desist order to Draft Kings and Fan Duel, which he saw as violating New York State gambling laws, in November of 2015. A number of additional states, including Illinois, Texas, Mississippi and Hawaii have also declared DFS illegal. The largest payment processor for both companies, Vantiv, served notice that they would no longer work with daily fantasy sports, effective February 29th, 2016. Paypal, subject to a class action suit in regards to processing payments for DFS, is watching the situation closely. So are credit card companies, also targets of class action suits. Citibank has stopped allowing customers to transact with DFS in New York. Other banks will most likely follow suit. This all could be a “crippling blow” to the industry, specifically the Vantiv pullout as it is uncertain “who will touch the industry if Vantiv”, a very important and more risk-tolerant processor for gambling, “will not”. Well, we bitcoin enthusiasts know of a cryptocurrency that will touch the industry.
MVP Lineup’s launch announcement on bitcointalk got me thinking about all this. MVP Lineup is a bitcoin-only DFS product hoping to capitalize on the chaos that will ensue should FanDuel et al exit the market. Indeed, this seems to be a very interesting test case for ‘bitcoin as instrument of regulatory arbitrage’ argument. Where unwanted regulation goes, bitcoin follows. So will MVP Lineup be successful?
I really doubt it. Bitcoin DFS could be successful when the market needs it (and that moment is not yet here) but the currency alone most likely will not compensate for platform and liquidity deficiencies.
Bitcoin has had success in US gambling before – bitcoin dice is still a massive market, and bitcoin-only poker room Seals with Clubs enjoyed some success after the removal of pokerstars and full tilt from the US market in 2012. But there are some crucial differences. Dice capitalized on the nerd-love for bitcoin and its underlying technology, its target market was entirely bitcoin-enthusiasts, and the game was entirely catered to the blockchain. Seals with Clubs rose out of the complete destruction of the US poker market, which was obliterated by the departures of the poker monopolies, left only with a few shady operators that often lost or ran off with player balances. Players went to Seals with Clubs because there was literally no choice, and the product was alright.
MVP Lineup looks like it is targeting the wrong demographic, at least partially as cover for what is a pretty poor product. Unlike Seals with Clubs, which was first publicized on massive poker forum 2+2, MVP lineup exists entirely on bitcointalk. They have integrated a “provably fair” component, hashing lineups so they are proven to be unchanged after the start of the event, and branding this as ensuring “no cheating like the fiat industry leaders”. This is a solution to a problem that either does not exist or nobody really cares much about, except perhaps a tiny sliver of the bitcoin tech-enthusiast population. (sorry to break out the popular image from 1998, but it really does fit…)
So even if MVP Lineup succeeds in becoming the “daily fantasy leader in the bitcoin community”, as one well-wisher wished, this population will not be able to sustain a daily fantasy sports site, and nobody is coming from the mainstream DFS sites any time soon to a substandard product with no liquidity offering provable fairness as a solution to a made-up problem. MVP lineup will most likely be the next in a chain of bitcoin DFS failures, following extrapoint.io, cointures.com, and coindrafts.com.
A bitcoin product has the potential to transform – or resurrect – Daily Fantasy Sports only when the regulators destroy the current marketplace. The product will look pretty much exactly like today’s DFS sites, only with bitcoin used as an uncensorable payment method after mainstream payment processors have bowed out. (Although companies like Coinbase will do their part to work with regulators, despite the fact that bitcoin use would most likely be of huge benefit to price and trading volume).
What happens if this as yet non-existing bitcoin site actually gets really big?
So yes, the DFS site would be uncensorable from a payment processing perspective, although additional pressure might be brought to bear through regulated exchanges. In an extreme scenario, individual users might be identified by following their transactions through the blockchain, though it seems unlikely the feds would go after users. But what about management?
Well, current US sportsbetting sites have been operating for years with offshore management. (which begs the question, if they are able to still use standard currencies for transactions, why wouldn’t the next generation of DFS sites?) So one option would be that management, support and operations would be based in offshore jurisdictions that would also provide the regulatory stamp. Costa Rica most likely.
The second option, and perhaps this is where the provably-fair shenanigans described above come in, is that the product itself is decentralized to the greatest extent possible. We’ve written elsewhere about Dapps, decentralized applications, which are essentially companies that self execute. Augur is currently trying to do this with prediction markets but, much like we see in DFS, the market is not yet in need of an alternative payment mechanism and so liquidity is non-existent.
Provable fairness might be the basis of a self-auditing mechanism; smart contracts might hold and release bets based on sporting outcomes calculated from numerous trusted feeds; arbitration might be community-orientated and based on reputation. Dividends might be paid out to management, which might be a few unknown individuals or a large group of investors, based on a predetermined formula and schedule.
However, operations cannot be entirely automated and so there must be some forms of centralization. Support teams need to be managed, staff hired and fired and offices rented. Perhaps this could simply be outsourced to external support services, but someone needs to manage the process and make the decisions. In any event, for a massive, FanDuel-esque product to operate in the United States for the long term in an unregulated environment, this might be the type of company we would see.
The counterargument of course is that it is possible to circumvent regulations with fiat currency, as 5dimes, betonline, and Bovado to name three have been doing for years. However, this is expensive and time consuming for customers and operator alike, requires actively tricking credit card companies and banks or resorting to things like moneygram or western union, and seems like an unsustainable anachronism. Even if they do stick around, one would think that at some point users will prefer to use instant and free deposit and withdrawal options, rather than the expensive and slow processing that currently is the norm in this market.
In any event, DFS provides a very interesting test case for bitcoin use to circumvent unwanted governmental intrusion. Definitely bears keeping an eye on, but the market ain’t ready yet. Check out bitcoin sportsbooks, however, for a flourishing, closely related market.