Original Research

The Market for First Blood

First Blood’s crowdsale starts midnight GMT September 26, 2016. It aims to be a decentralized wagering platform for P2P competitive gameplay. People can bet money on their own 1v1 or team-v-team games, such as Counter Strike: Global Offensive, DOTA 2, and League of Legends. Anyone can challenge friends or strangers to a match, and a network of nodes will verify results. Anyone can also organize tournaments or leagues for people around the world.

The network will run on Ethereum, smart contracts will distribute the wagered funds (in the short-term, ETH), and special nodes will automatically verify game results. The nodes are called “witness nodes,” and they earn fees for serving as nodes.

The ICO involves the 1ST Token, which lets its holder serve as a witness node.

In this article, Smith+Crown shares some of its internal thinking on First Blood and the 1ST Token. If you’re impatient, check out this spreadsheet where we perform our calculations, explain our thinking, and document our data sources.

What is the market for this platform?

One thing to clarify: this is not a gambling platform. Players wager on their own outcomes, not the outcomes of others. This allows the team to skirt anti-gambling laws that apply to eSports. Their target market is different: individuals who want to pay to compete for money.

We imagined three market segments for this service. All are mostly hypothetical, because the means of easily doing this have been limited.

  • “Minor Leagues” of eSports: a collection of independent semi-professional tournaments in which amateur teams can compete for attention and eventual sponsorship in more established eSports circles. The feeder system for many eSports professional leagues is often relatively small and draws directly from ranked ladder matches, where individuals and teams are paid nothing and have neither visibility nor support. It’s the equivalent of a “walk-on” in sports. We imagine that a decentralized platform like First Blood could let anyone start organizing tournaments. Aspiring eSports professionals could gain visibility and established eSports teams could more easily scout for talent.
  • “Intramurals of Gaming”: regular of casual matches between organized teams. A group of friends will build a team in a given game and on a set time each week, compete with another such amateur team in their league. These players don’t want to play professionally anymore than community-league baseball players want to be professionals. But they would enjoy something more coherent than the equivalent of pick-up gaming, and they’d be willing to pay a small fee.
  • Casual individual betting: players would will actually challenge friends and strangers and wager money. We imagine this as the equivalent of a group of friends playing casual poker (with a modest buy-in) or wanting to raise the stakes on a LAN party night.

The fourth potential market segment are people who don’t want to wager but want to go through First Blood anyway. Without some other compelling features on First Blood, players who don’t want to wager seem unlikely to migrate to the platform.

How big are these markets–and how does that translate to 1ST tokens?

Holding 1ST tokens entitles the holder to serve as a witness in verifying match results. For most matches, this will be done automatically, and a node’s chances of being selected to serve as the witness will depend on their proportional holdings of 1ST–up to a maximum of 1% per game if the node holds 1% or more of all tokens. Serving as a witness earns fees, though the formula hasn’t been determined. In this, we assume the fee will scale based on the amount wagered but that there will be a minimum fee even for games not involving wagers. Being a witness also entitles one to serve as a jury member to resolve disputes in case the witness software malfunctions or someone contests its results. This also involves (yet to be revealed) fees. We assume all fees scale with the amount wagered rather than being a flat fee, so the platform can take advantage of large semi-professional activity involving big bets.

It’s not the total size of the markets that matter: it’s the portion of those markets that might flow through First Blood and be eligible for tokens. For competitive matches, this will be similar to prize pools in tournaments. The total market for eSports is huge and projected to crest $1 billion by 2020, but most of that is in advertising, licensing, and ticket sales. None of these need to be ‘wagered’ and would occur off platform–or at the very least, would not involve the witness nodes.

We tried to apply some numbers to these markets to gauge their potential. The minor league of eSports doesn’t actually seem that big, because not only is the amount of money involved in minor league sports so small relative to the mainstream leagues, the amount that goes to players (isn’t advertising, licensing, and ticket sales) is abysmal. In American baseball, the combined salaries of the 850 professional players is  around $3 billion; for the over 5,000 minor league players, around $50 million. (see sheet for sources)

Our analysis suggests that serving as a witness node could be lucrative over time under certain market conditions. If the market continues its growth, it could be even more lucrative. However, success does require some non-existent markets coming together.

Here is a sheet laying out our analysis. We may be updating in the days ahead. Check it out and let us know if you have suggestions (research@smithandcrown.com).

Note: analyzing returns over time would be helpful, but just getting to plausible market numbers irrespective of changes over time was difficult enough. Adding too many flirts with the arbitrary.

Challenges

There are a couple challenges First Blood will encounter.

Surviving while the market emerges

The market of gamers is growing, the market of would-be wagerers is still taking shape, and the market of cryptocurrency adopters is very small. In the short term, First Blood will need people who know of Ethereum AND play competitive games AND want to wager money on their own games to keep the system afloat–and keep incentivizing nodes. If the network of witness nodes sticks around long enough and payment gateways lower the barrier to acquiring Ethereum, First Blood can probably be the primary provider of P2P eSports wagering.

Matchmaking isn’t easy

If players are going to bet money, they will want to know either their opponent or their opponent’s general skill level. No one bets money to play Michael Jordan (or even a college athlete) at basketball. But good matchmaking is something gaming conglomerates are still working on. Whether matchmaking is done by First Blood or by a third-party, it will be critical to long-term success as a platform for competition.

What to do with the gambling market

Sports gambling is a gigantic market, and esports gambling is only growing. The team has explicitly said it this isn’t its path and implied that regulatory action could threaten many of its competitors who lean into the gambling market. The law is on their side for a global service: gambling laws not only vary country to country but they vary state to state. Allow it wholesale and a company is operating illegally somewhere. Try to customize the service based on the state of the user and the company ties itself in knots–and probably still operates illegally. Bar it and a company walks away from the entire market.

If First Blood has a working decentralized system of game-result verification, it could pivot to gambling. If it doesn’t, could someone just copy the protocol and do it instead?

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