1. INTRODUCTION

BetSwirl is a betting platform that offers its users and other protocols an easy, fair, trustless, and decentralized way to play interactive games. It has a B2C and B2B offering. Users can bet directly through their frontend, using their tokens $BETS or the native tokens of the chains they are currently at (Avalanche, Polygon, BSC, Arbitrum), or through the frontend of different partners, using their respective tokens. Examples of these partnerships are: Titano, Sphere, ThorFi, MDB, Jarvi, and Alienzone.

The business model of these partnerships will be explained later, but it´s a win-win for both as it brings them a broader range of gaming options and increase revenue opportunities.

The BetSwirl investment thesis is based on three pillars:

1. BETS benefits from online betting structural tailwinds.

2. BETS B2B business model as a pick-and-shovel play for introducing gamification to protocols´ communities.

3. BETS has attractive economics.

If BETS can continue to benefit from crypto betting volumes shifting from off-chain to on-chain casinos and on-chain betting shifting from “web 2.5” platforms that only use crypto as the settlement layer like Rollbit, to web3 on-chain transparent and non-custodial casinos, BETS could return 4.9x in a base case and 8x in a bull case.

The report details the investment case, outlines BETS valuation and explains where the thesis could fall short. Date of writing and data as of May 24, 2023.

2. BETSWIRL INVESTMENT THESIS PILLARS

1.     BETS benefits from structural tailwinds

BETS benefits from 2 structural tailwinds:

i) Shift from off-chain to on-chain betting platforms:

Online betting is conducted in two types of venues: off-chain and on-chain platforms. Off-chain examples include traditional gambling sites such as Bet365, Williamhill, and DraftKings.

Off-chain traditional platforms historically dominate betting for three reasons:

1. Onboarding: betting on-chain first requires converting fiat into crypto. There is an extra layer you must surpass.

2. Longevity: Online off-chain gambling has been happening for nearly 10 years whereas on-chain came to market just a few years ago.

3. Execution: off-chain gambling has historically offered faster and cheaper (you obviously don´t pay gas fees) bets.

However, I believe on-chain platforms will take share from off-chain platforms because:

1. Improving tech:

• Interoperability: On-chain betting platforms can embrace interoperability protocols like cross-chain bridges allowing for seamless integration with other blockchain networks or decentralized applications (DApps).

• Slippage: On-chain betting platforms can leverage advanced technologies, such as automated market makers (AMMs), to minimize slippage.

2.     Preserving anonymity:

• Permissionless onboarding: On-chain betting platforms often allow users to join and start betting without requiring extensive verification processes or KYC (Know Your Customer) procedures.

ii) On-chain, transparent, and non-custodial betting platforms are best positioned to grow:

Platforms like Stake, Gamdom, or Rollbit, despite falling under the on-chain betting category, only use crypto as the settlement layer, so they are custodial and non-transparent. The shift from using crypto as a settlement layer to a truly on-chain transparent and decentralized sportsbook offers significant growth potential. This is driven by several key factors:

1. Permissionless: On-chain betting platforms operate in a permissionless environment, where users can approve bets directly and funds are held securely in an escrow smart contract until settlement. There is no need to rely on intermediaries for custody, providing users with full control over their funds.

2. Instant and Verifiable Settlement: On-chain betting platforms prioritize instant settlement, enhancing the user experience. Settlements occur seamlessly, and payouts are guaranteed through a robust house pool.

3. Incentive Alignment: Participation in the growth of the protocol is open to everyone. If House LP isn´t private (sometimes it is), users can contribute liquidity and become part of the house pool, aligning incentives, and creating a vibrant ecosystem that benefits all participants. Also, these protocols may redistribute revenue through staking mechanisms.

2.     BETS B2B business model as a pick-and-shovel play

Betswirl offers other communities and protocols the possibility of adding a “gaming” feature to their token, enabling the possibility of wagering and playing pvp games with it (like their new Russian Roulette game). They also unlock new revenue streams for their protocol, which they can redistribute with their own token-holders + they are enabled access to the bankroll which is private and only available to the team or partners. You can see below the ROI of some of the partner´s tokens included in the bankroll:

BetSwirl in exchange of these partnerships and for providing these wagering features to its partners, gets a cut from the revenue earned through the wagering of their partners´ frontend and native tokens + charges a one-time fee, which can be seen below. Their partners have always been very low market cap protocols, if they managed to land a big partnership, with a big community, the revenue opportunity is insane for both parties.

Bankroll

The target of the bankroll is to reduce risk (they allow 2% of the balance per bet) and increase its balance. It can be very volatile (losing 10-20% in a few won bets), that´s why they have implemented some mechanisms to try to reduce this risk. The success of BETS lies in having a healthy Bankroll that can withstand high betting volumes consistently. The economics were designed with that purpose.

1. There is a house edge bankroll allocation of 40%. They get 40% of earned revenue coming from users won bets.

2. They limit the maximum bet users can make depending on the bankroll of the token they want to bet at.

3.     BETS Economics - Revenue

Total revenue comes from players winning a bet on one of their games. They take 2.5-3.5% of the payout (bet amount + profit). This total revenue then gets divided into 3 categories in a 30/20/50 split:

1. Dividends, get 30% of total revenue.

2. Treasury, get 20% of total revenue.

3. Partners + Team + Bankroll (which is private and only accessible to partners), get 50% of total revenue.

On this graph, you can see the revenue evolution since inception and how it gets split into these 3 categories.

In terms of dividends, since formally launching in June 2022, they have accumulated $207,000 in dividends revenue, which is money available for token-holders once staking is enabled.

Although the treasury allocation currently serves the purpose of being a “margin of safety” for the bankroll and to pay other operational and marketing expenses, once BetSwirl becomes more decentralized, token holders would be receiving 50% of the total revenue, 30% directly through the staking-dividend mechanism and 20% indirectly through the governance of the Treasury allocation, as it would be an “asset” available to token-holders.

These dividends can be found on these different addresses:

• Avalanche: 0x3af08e71de969b4b3ae7ea3aaf3553b4fbdd21f1

• Polygon: 0x8164380204b66e37c8b6c495928f13c8e7e63c8d

• BSC: 0x373b02accd2ba3c5c23fba1f46c04efbcd4ad695

• Arbitrum: 0xaf5782bc03cc71e1b3d84bcc3ee70c4b1bf863f4

Dividends are in the L1-L2 tokens of the chains they are deployed. They convert the revenue earned from the take rate of players' profits to these L1-L2 native tokens every month.

Due to dividends being in these tokens, their value changes from time to time. Since 2022 (when they started accruing), price action hasn´t been optimal, which is why their exposure to this price volatility has been bad, as can be seen in this graph.

As most of the dividends have been earned on Avalanche (where most of the wagering comes from) they are mostly exposed to the AVAX token price. I expect them to diversify this exposure, which could be done:

• Stop converting revenues to L1-L2 tokens but to more blue-chip ones, like ETH or USDC.

• Incentivize wagering on Arbitrum, as revenue is converted to WETH, so by volume mix you get this diversification of revenue.

Capitalizing revenue (dividends and treasury revenue split)

Solely based on these dividends, BETS trades at the equivalent of a 7.1% dividend yield and 14.1x earnings and has grown earnings at a 148% CAGR over the last 3 quarters.

There is an argument to be made that the 20% allocation of the Treasury is also available to token-holders and thus should count as earnings. If BetSwirl ends up decentralizing and token holders start governing the protocol they could manage this 20% allocation to the best protocol´s interest. Sometimes it may be to pay opex, other times to improve the margin of safety of the bankroll and others as additional cash flow for token holders. Based on this, BETS would be trading at the equivalent of a 11.8% dividend yield and 8x earnings.

Nevertheless, to remain conservative, the forecasted revenue that will be capitalized through the multiple will only take into account dividends revenue.

TOKENOMICS – Supply overview

BETS market cap currently stands at $3.5M, with a 70% Mcap/FDV ratio, with the remaining 30% being in the treasury. It falls under the low market cap category and has low liquidity as it´s fragmented across its 4 supported chains. The most traded pair is on Polygon as it´s the one with the highest liquidity.

Regarding TGE allocation:

All of which are vested since March 15, 2023:

3. VALUATION

SHARE GAINS AND REVENUE GROWTH

I use a fundamental approach. Total revenue can be forecasted based on overall betting market growth and share gains. Revenues to BETS token holders are derived from total revenues (they get 30% of them). The revenues, which are equivalent to earnings, are paid to BETS token holders once staking gets enabled. Right now, they are accumulated as an “asset available to token holders” (aka “retained earnings” in Tradfi).

BETS revenue can grow in two ways. First, overall betting volume growth. If betting volumes keep growing at the pace they have in the past, BETS games could see some activity. I expect Q3 and Q4 to be kind of boring trading volatility-wise. In bear markets there is gambling. It’s a macro bet. Second, is share gains. BETS revenue can grow substantially from share gains. There are three ways BETS could gain share:

• On-chain takes share from the off-chain betting market.

• Inside the on-chain betting landscape, web3 protocols take a share from the web2.5 ones that only use crypto as the settlement layer.

• Inside web3 protocols, BETS takes share from competitors: BETS has a 5.3% market share of the volume wagered on on-chain protocols, according to DappRadar.

The illustrative valuation below sensitizes overall betting volume growth, and the three avenues from which non-custodial on-chain protocols and BETS can take share. The resulting BETS revenue is forecasted and capitalized at different multiples.

In the bear case, overall betting volumes stay stagnant, and BETS loses share. Earnings are capitalized at 10x resulting in 62% decline in BETS token price. In the base case, there is a 5% growth in overall betting volumes, on-chain casinos gain share and earnings are capitalized at 15x resulting in a 4.9x investment. In the bull case, there is 10% betting volume growth, non-custodial on-chain casino´s gain share, and earnings are capitalized at 17.5x resulting in a 8x return.

TRADING COMPARABLES

The sector BETS is competing is “GambleFi” or prediction markets. Last February-March there was a bit of a Gamble-Fi narrative led by Arbitrum tokens. Now it´s pretty much dead in terms of token trading volumes, but BETS has continued receiving betting volume and thus earning revenue. Its fundamentals are stronger than ever, which makes it a very interesting value play.

As seen in the comps table, it´s undervalued relative to its competitors in terms of FDV / TVL, FDV / Volume or FDV / Fees multiples.

4. CONCLUSION

CATALYSTS

• B2B: A) Web 2 expansion for their B2B offering: big casino that will list their games where it'll get between 8 to 12.5% of the revenue. B) Alienzone partnership, related to GMX Blueberry Club, already signed, to be implemented this month. Will probably bring decent wagering volume and thus revenue to their Arbitrum line.

• Staking going live next month.

• Decentralization of the protocol, giving more power and potential revenue to token holders.

• Sports betting: Azuro partnership to expand into the sports betting market. They will be launching on Polygon first.

RISKS

• Overall on-chain betting volume going down, due to the infancy of the technology and user experience not being yet at the off-chain standards.

• Competitors arising and taking betting volume market share away from BetSwirl. One example is WINR, which recently launched and has been doing 1.2M daily volumes.

• BetSwirl betting volume is led by very few active wallets, most of them primarily on Avalanche. There is a possibility that this volume is toxic, which means that despite it being real and shown on-chain it can be to game some metrics.

• Deadlines not being met in terms of staking going live, or the Azuro partnership not being finally implemented on time.

DISCLAIMER: I hold $1.3k in BETS that I bought at an average price of $0.00055 (current price $0.00072). This isn´t sponsored and nothing said here is intended as financial advice.

My address is tumilet.eth, you can check when I bought them and at what price.

EDIT: After writing the thesis, on the 26th of May, the team sent me a $500 grant:

https://twitter.com/BetSwirl/status/1662005080910974977