The Rollup - SX Bet - Revelo Intel

In this episode of The Rollup, which took place on August 1, 2024, Andy and Robbie hosted Andrew Young to discuss the transformative role of prediction markets in the blockchain space, innovations in sports betting, the challenges of cross-chain liquidity, and more. Read our notes below to learn more.

Background

Andy (Host) – Co-Founder of The Rollup

Robbie (Host) – Co-Founder of The Rollup

Andrew Young (Guest) – Project Lead at SX Bet

SX Bet – a web3 sports betting platform

SX Network – an app-chain for sports betting

Decoding Prediction Markets: From Niche to Mainstream on Blockchain Platforms

Andy introduces the topic by addressing the common belief that there are no apps and everything is infrastructure. He aims to debunk this by discussing prediction markets on-chain, a use case he believes in strongly.
Robbie expresses excitement about prediction markets and how they can influence their own outcomes. He introduces Andrew from SX Bet, who is involved in the prediction market and sports betting space, now deployed on Arbitrum.
Andrew discusses the evolution of SX from its early days as Sport X on Ethereum mainnet in 2019. He explains the initial challenges, including high fees, slow block times, and the lack of user-friendly wallets and fiat on-ramps. He notes that these issues have been resolved with advancements in infrastructure, such as cheaper, scalable chains, inbuilt fiat on-ramps, and a larger pool of on-chain users.
Andrew highlights that while prediction markets are gaining traction, particularly due to political events, sports betting has a much larger potential market. He believes sports betting will see a bigger long-term explosion compared to politics betting, as it has a continuous flow of events compared to the infrequent nature of political events.
Andy reflects on the increasing speculative behavior in society post-COVID and asks whether prediction markets are one of the best use cases for blockchain technology.
Andrew agrees that prediction markets are a strong use case, placing them in the second phase of crypto adoption. He contrasts this with the first phase, which focused on internal blockchain apps like Uniswap, existing within a self-enclosed financial system. Prediction markets, in his view, combine elements of both consumer crypto and DeFi, making them a hybrid use case. He acknowledges that prediction markets are still relatively small compared to the broader DeFi ecosystem but sees their hybrid nature as a key reason for their growing traction.
Andrew also points out that prediction markets have lower average transaction sizes compared to traditional DeFi applications. He credits the recent success of prediction markets to the launch of faster smart contract chains like Polygon and Solana, which have enabled more mainstream adoption.

Analyzing Liquidity and Market Challenges in Sports and Political Prediction Platforms

Andy asks Andrew about the apparent discrepancy in Polymarket, where sports betting isn’t as popular as political prediction markets, questioning whether this undermines Andrew’s thesis that sports betting is the bigger market.
Andrew explains that Polymarket is designed primarily as a prediction market platform, which caters more to political traders, evidenced by their UI and how they attract users from centralized platforms like PredictIt.
He acknowledges that sports betting is a more competitive and challenging market to disrupt, but he believes it’s the larger and more sustainable prize. He points out that SX Bet, which is focused on sports betting, is gaining traction and achieving milestones like offering the best odds across major sports leagues.
Robbie shifts the discussion to the challenge of sourcing liquidity in sports betting on platforms like SX and Polymarket. He notes that unlike traditional sports books, which always have someone to take the opposite side of a bet, platforms like SX and Polymarket require sourcing both ends of liquidity, leading to thinner order books and potential issues with matching bets.
Andrew acknowledges this challenge, particularly with long-tail sports events and exotic markets like player props. He explains that SX has developed a network of over 50 market makers to address this issue, but admits that certain markets still struggle with liquidity. He notes that these niche markets are more prone to “fast clicking,” where market makers are at a disadvantage due to delayed reactions to news or events.
Andrew mentions that while liquidity is more challenging to provide in these markets, SX is focused on gradually expanding from major sports and popular markets to more niche offerings.
He also points out that traditional sportsbooks often offer illusory liquidity, quickly banning or limiting successful bettors, which SX aims to improve upon by building better systems, such as their recently launched peer-to-peer parlays, the first of its kind in the world. This system allows users to combine multiple bets into one, with market makers providing quotes in real-time, paving the way for more comprehensive offerings with better liquidity.

Tackling Liquidity Challenges in Prediction Markets

Robbie highlights that SX is not alone in tackling liquidity sourcing issues, mentioning how this challenge appears in various forms across different platforms. He notes that in sports betting and micro betting, where bets can go down to individual plays, liquidity can be hard to find, similar to the challenge faced in esoteric prediction markets.
He also mentions the approach by platforms like Everclear, which try to match liquidity across different chains through a clearinghouse method.
Andrew explains that SX’s vision is to create a global liquidity hub for sports betting, aiming to connect the fragmented pools of liquidity in the industry. He notes that the current sports betting landscape is highly fragmented, with closed pools of liquidity and limited data flow. SX aims to reduce transaction costs significantly, similar to how DEXs have revolutionized trading by making it more open and efficient.
Regarding permissionless markets, Andrew acknowledges the appeal but also the challenge. He explains that while everyone wants the ability to create their own markets, the core issue is that no one wants to provide liquidity for them.
He mentions that Polymarket addresses this by subsidizing liquidity, but he sees this as a temporary solution rather than a sustainable one.
Andrew also points out the difficulty in resolving certain markets, especially when outcomes are ambiguous or controversial, such as political events or sports outcomes where rules or results may change after the fact.
Andrew discusses the technical differences between SX and other platforms like Polymarket. SX allows for the unwinding of trades when markets are voided, which ensures that users get back exactly what they put in, unlike other platforms where users might lose value if the event is canceled or voided.
Robbie adds that one of the most valuable aspects of prediction markets is their role in arbitrating truth. He points out that in a world with information overload and biased perspectives, prediction markets can drive consensus by incentivizing accurate outcomes, making them a powerful tool for determining the truth in complex or controversial situations.

Harnessing Prediction Markets: Challenges and Innovations at SX

Andrew appreciates the public good aspect of prediction markets, noting that they provide valuable information, but he highlights the challenge of funding this public good. He acknowledges the difficulty of sustaining prediction markets, especially when dealing with esoteric markets that attract only informed participants, leading to “toxic flow” where market makers face significant risks.
Andrew shares that SX recently had its best Q2 ever in terms of betting volume and users, even after cutting liquidity incentives to zero. This success indicates that SX has achieved product-market fit, where users and market makers are participating without needing subsidies. Initially, SX did offer liquidity incentives through a mechanism called “BET mining,” but as the platform matured, these incentives were phased out.
Andrew explains that SX is unique because it also operates its own rollup, which allows them to internalize revenue and manage the platform more efficiently. This setup is similar to how other blockchains manage their appchains, capturing value that would otherwise be lost to external ecosystems. The $SX token benefits from this structure, offering value through the platform’s revenue and governance.
Robbie dives into the technical side, asking Andrew to explain the evolution and challenges of SX’s appchain approach. Andrew details the journey, starting with SX launching on Ethereum in 2019, facing high gas fees during DeFi summer, and then migrating to Polygon POS in late 2020 to scale. However, as Polygon POS faced its own issues, SX decided to build its own infrastructure using Polygon Edge, eventually launching SX Network.
When Polygon decided to sunset Polygon Edge, SX faced new challenges. Recognizing the need for a sustainable, long-term infrastructure, they opted for a hybrid approach: launching an Arbitrum Orbit rollup for their core users and a lighter version of SX on multiple chains to cater to crypto natives. This strategy allows SX to maintain a dedicated, scalable platform for professional bettors while still reaching broader audiences across different ecosystems.
Robbie summarizes that SX operates at multiple levels: an L3 appchain on Arbitrum Orbit, with SX Light functioning as a more accessible version across various chains.
Andrew confirms this, explaining that SX Light acts like a sportsbook, placing bets against a contract that is hedged on the SX rollup. This model is highly capital-efficient, enabling SX to support cross-chain operations while maintaining economic viability.
Andrew says that sports betting, with its rapid turnover and short-term open interest, is well-suited for this cross-chain model, making it an ideal use case for innovative blockchain infrastructure.

Innovations in Sports Betting: SX’s Cross-Chain Solutions and Future Expansion Plans

Robbie praises the sports betting industry for its ability to innovate ahead of broader DeFi trends, noting how sports betting platforms like SX are addressing challenges such as cross-chain composability and cross-rollup transactions.
He points out that SX uses a relayer model to integrate a multi-chain experience into a single rollup settlement network, the SX rollup appchain, allowing them to tap into liquidity from various chains like Arbitrum One and Polygon.
Robbie asks Andrew to explain where SX has these implementations and whether it’s possible to bring off-chain sportsbooks like DraftKings into this model.
Andrew responds by stating that SX currently operates on two chains: the SX rollup, which offers full functionality, and Arbitrum One, where it provides pre-game betting. He mentions plans to expand cross-chain live betting and parlay options. Andrew highlights the potential for SX to expand into other ecosystems, such as Berachain, Monad, and Scroll, which they find promising for future growth.
On the more complex question of integrating off-chain sportsbooks like DraftKings, Andrew explains that these platforms are highly siloed and closed systems. DraftKings, for example, does not provide APIs or access to their data flow, making it impossible to relay their order flow on-chain. Additionally, sports betting platforms like DraftKings operate with a predatory model, adjusting user limits based on their betting history, which further complicates the idea of integrating their liquidity into a decentralized system.
Andrew suggests that instead of trying to tap into traditional sportsbook liquidity, SX is focused on building a more transparent, permissionless system that could eventually grow large enough for off-chain sportsbooks to want to connect to it.
Andy asks why SX chose Arbitrum Orbit for their rollup instead of another rollup stack. Andrew explains that their priority was selecting a battle-tested system to avoid future migrations, as SX has already moved from Ethereum to Polygon POS to their own network on Polygon Edge. Arbitrum Orbit met their needs for performance, offering fast block times, which are essential for features like cross-chain live betting and potentially a fully decentralized on-chain order book.
He also praises the Arbitrum team and community for their support, including a grant that helped SX become the largest GambleFi project on Arbitrum One. This support, combined with the technical benefits, made Arbitrum Orbit the ideal choice for SX’s final migration.

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Show Information

Medium: YouTube (Video)

Show: The Rollup

Show Title: How Prediction Markets Have Become Crypto’s Killer App

Show Date: August 1, 2024