SX Network (SX)

Decentralized Prediction Market

Key Metrics

• Circ. Market Cap: $39m

• Fully Diluted (FDV): $65m

• DAO Treasury: $19m

• SX Token ADTV (30day): $89k

• Bet Volume (30day): $14m

• Circ. Supply Staked: 34%

• Staking Yield: 7.2%

• Token Inflation: 1.5%

Please refer to the bottom of this page for important disclosure information.

estimated reading time: 30–40 minutes

Key Points

A DApp with Real-World Utility

SX Bet is a decentralized prediction market geared towards sports betting. Unlike centralized competitors like Rollbit and Stake.com, SX Bet is a non-custodial DApp enforced by smart contracts. As the Web3 community yearns for real world use cases, SX Bet provides evidence that decentralized apps can offer superior products than centralized alternatives. In the coming months, SX Bet will launch cross-chain betting across multiple chains while using third-party token incentives to accelerate user acquisition. We see this driving more attention to the SX token, particularly alongside growing interest in decentralized prediction markets.

Superior Product vs Centralized Competitors

SX Bet (sx.bet) brings Web3’s advantages to online wagering. While centralized betting apps like Stake.com and Rollbit are attracting billions in crypto deposits, these custodial platforms offer limited recourse and weak consumer protections. Alternatively, SX Bet is non-custodial, publicly verifiable and enforced by smart contracts. This decentralized structure allows SX Bet to offer superior odds, where “VIGs” on SX Bet are consistently the lowest among sportsbooks globally.

SX Network: A GambleFi Appchain

SX Network an EVM-compatible appchain that hosts SX Bet and third-party GambleFi DApps. This summer, SX Network will transition from a Polygon Edge sidechain to an Arbitrum Orbit L2. This transition increases transaction throughput by ~8x while improving security and bridging. Once the migration is complete, several third-party developers will launch GambleFi DApps, such as on-chain copy-betting and SocialFi for betting advice. The SX team will also launch a DApp with casino games that buys back SX tokens with casino revenue.

Cross-chain Expansion Accelerates Addressable Market

SX Bet is expanding across multiple L1 and L2s by launching cross-chain betting capabilities. Users can already place cross-chain bets from Arbitrium, and SX Bet will expand across 5+ chains in the coming months. Not only does cross-chain wagering increase the addressable market and reduce user friction, but SX is using grants from L1 and L2 foundations to accelerate marketing efforts. This includes a 500k ARB grant from Arbitrum that SX is using to ramp user acquisition.

Underfollowed SX Token Trades at Discount to Peers

SX is a deeply underfollowed token, despite SX Bet facilitating ~$500m in wagers since 2019. As SX Bet launches on multiple L1s and L2s, third-party token incentives can help bootstrap marketing efforts and token liquidity. Meanwhile, emerging prediction markets like Polymarket and Azuro are capturing attention from the broader crypto community. SX token trades at a deep discount to peers on an absolute and relative basis, despite SX Bet’s 15-20% market share of on-chain betting. As SX Bet user activity ramps and as prediction markets attract more attention, we expect increasing awareness for the SX token.

TL;DR

• Protocol Background

  • SX is the governance token and gas token of SX Network.

  • SX Bet is a decentralized prediction market for permissionless wagering.

• Low GambleFi Penetration of Crypto Wagering

  • Centralized platforms like Stake.com and Rollbit dominate crypto wagering.

  • On-chain betting has lower penetration than crypto spot DEXs.

• Technical Details

  • SX Network will become an Arbitrum Orbit appchain.

  • SX Bet is a permissionless prediction market for on-chain betting

• SX Network Ecosystem

  • SX Network is attracting 3rd party DApp developers.

  • The appchain hosts both GambleFi and DeFi DApps

• Development Roadmap

  • SX Bet is launching additional features to compete with CeFi sportsbooks.

  • L2 migration and casino games can improve SX’s tokenomics.

• SX Community

  • SX Bet’s user base includes crypto natives and traditional sports bettors.

  • User activity is accelerating alongside cross-chain expansion.

• Tokenomics

  • Protocol revenue accrues to SX token holders.

  • SX token inflation will decline alongside upcoming upgrades.

• Peer Valuations Reflect SX Discount

  • SX trades at a discount to peers, both on an absolute and relative basis.

  • SX Bet’s migration to an Arbitrum Orbit L2 can accelerate volumes.

• Risks to SX

  • SX faces intense competition from both CeFi and DeFi wagering platforms.

  • SX Bet is exposed to regulatory risks related to both crypto and gambling.

• Core Contributors

Protocol Background

• SX is the governance token and gas token of SX Network.

• SX Bet is a decentralized prediction market for permissionless wagering.

SX Network Overview

SX Network is an appchain dedicated to decentralized gambling, i.e. GambleFi. Its core product is SX Bet, a decentralized exchange for sports betting and other prediction markets. The SX appchain also features 3rd party DApps including a SocialFi DApp and DeFi protocols for trading and liquid staking. The SX token launched in 2021 and has a total supply of 889m (81% fully vested).

SX was founded in 2017 by a team in based Canada. The team raised $15m in venture funding to date, with CMS, CMCC and Draper Dragon participating in the latest funding round. SX Bet originally launched on Ethereum in 2019 and subsequently transitioned to Polygon in 2021. In 2022, SX migrated to its own appchain using the Polygon Edge SDK. This summer, SX Network will transition to an Arbitrum Orbit Chain.

Figure 1: SX Bet – Monthly Betting Volume ($M)

Low GambleFi Penetration of Crypto Wagering

• Centralized platforms like Stake.com and Rollbit dominate crypto wagering.

• On-chain betting has lower penetration than crypto spot DEXs.

Product Market Fit

Web3 offers an unlimited number of use cases; however, speculation remains its #1 demand driver today. Web3 activity and gas fees typically spike during periods of rampant speculation. Mobile apps like Coinbase and Phantom also typically breach mainstream adoption during speculative frenzies for memecoins and NFTs.

Applications that target crypto’s “degen” culture can quickly attract large userbases, particularly play-to-earn gaming, SocialFi and Perps trading. As such, we see few DApps that offer a better product-market-fit than betting applications (i.e. GambleFi).

CeFi Crypto Casinos

Despite a strong product-market-fit, decentralized wagering has low penetration among crypto users. Alternatively, centralized betting platforms like Stake.com, RollBit and Shuffle.com have found tremendous success targeting crypto users. These apps allow users to deposit and gamble using crypto. That said, these market share leaders are centralized platforms (CeFi) with significant trust assumptions.

Figure 2: Annualized Wagers Denominated in Crypto ($bn)

Data from SoftSwiss indicates that crypto casinos attracted over $35bn in wagers in 2023, growing 21% from the prior year. SoftSwiss is a leading B2B software provider that supplies leading online casinos like Stake.com and Rollbit. Most crypto wagering platforms operate in “grey markets”, i.e. countries/regions without explicit gambling regulations.

Online gambling isn’t necessarily illegal in regions like Brazil, British Columbia (Canada), or even India and Japan. However, these regions do restrict onshore online gambling companies. As such, users gravitate to “offshore” platforms based in countries like Malta or Curacao.

While it’s not illegal for residents in grey markets to place wagers on offshore gambling websites, consumer protections are extremely weak. Because these countries don’t have explicit gambling regulations, users have little recourse when deposits are misappropriated, or winning bets are nullified.

Web3 GambleFi serves grey market users particularly well, where decentralized and trustless applications offer superior consumer protections:

• Self-custodial, where users are always in control over funds.

• Trustless smart contracts, where users can verify winning wagers are honored.

• Proverbially fair, where users can confirm the odds for each bet.

• Permissionless, where savvy users are not banned from participation.

Low DeFi Penetration

Despite its advantages over CeFi gambling applications, GambleFi DApps retain low penetration relative CeFi platforms like Stake.com and RollBit. The leading decentralized wagering protocols are Polymarket, SX Bet and Azuro. Collectively, these DApps facilitated $304m of wagers in 2Q24, representing less than 3% of wagers across CeFi crypto betting platforms.

Figure 3: Decentralized Prediction Markets – Monthly Betting Volume ($m)

DeFi wagering has already grown over 300% YTD, as protocols like Polymarket start to gain broad based attention. Meanwhile, spot trading on DEXs is historically 10-15% of volumes on CEXs. As DeFi wagering continues to take share, a 10% penetration rate seems attainable within the next few years.

Figure 4: DeFi Penetration vs CeFi (2Q24)

Longer-term, DeFi wagering has an opportunity to take share from the traditional Web2 online gambling industry. Online casinos and sportsbooks generate over $100 billion in revenue globally and are among the fastest growing B2C markets. Industry revenue has accelerated in recent years as new jurisdictions like the U.S. remove online gambling restrictions.

Figure 5: Global iGaming Revenue ($bn)

Technical Details

• SX Network will become an Arbitrum Orbit appchain.

• SX Bet is a permissionless prediction market for on-chain betting.

SX Network Whitepaper

A deeper overview of SX can be found in the developer docs here.

SX Network Appchain

SX Network is an appchain within the Polygon ecosystem; however, the network is transitioning to an Arbitrum Orbit Chain this summer. After the migration, SX Network will become a Layer-2 validium that settles onto Ethereum and uses an off-chain Data Availability layer.

Similar to standard L2s, SX will have a centralized sequencer that executes transactions. SX will have a trustless bridge between Ethereum, while using an off-chain Data Availability layer to enable higher throughput and lower transaction costs than typical rollups.

Figure 6: Arbitrum Orbit Chains

After transitioning to an Arbitrum Orbit chain, block times on SX Network will be significantly faster. Post migration, block times will decline from 2 seconds to 250 milliseconds. Faster block times will improve SX Bet’s user experience by enabling higher frequency waging and a lower rate of failed transactions.

SX Bet DApp

SX Bet is the main DApp on SX Network. SX Bet is a decentralized sports betting exchange and prediction market. Unlike CeFi platforms like Rollbit and Shuffle, SX Bet is peer-to-peer. The application uses smart contracts and on-chain settlement to enable trustless wagering.

Every bet on SX Bet is recorded on chain. Once a user places a bet against an active offer, the wagers are locked into an escrow smart contract until the completion of the event. Once the event’s results are finalized, the winning user will receive their initial wager plus winnings. Users can place bets denominated in USDC or SX; however, a vast majority of bets are in USDC.

Figure 7: SX Bet Structure

Users place bets by “taking” an existing bid or by “offering” a bet of their own. While users can place offers at any odds they want, only bets with competitive odds are usually taken by other users. This creates a free-market environment that improves users’ odds across the platform.

Figure 8: SX Bet – Orderbook

“VIG” is a term in sports betting that quantifies the spread between both sides of a specific bet. Because bets placed on SX Bet are peer-to-peer rather than against a centralized counterparty, spreads on SX Bet are typically narrower than on CeFi platforms. While CeFi platforms must offer attractive odds to compete with other CeFi platforms, each wager on SX Bet must compete with bids from other users.

Figure 9: Betting Odds – SX Bet vs Web2 Sportsbooks

Native Oracle

SX’s native oracle is among its most unique features. SX’s native oracle determines event outcomes that are used for settling bets. SX Network has a decentralized oracle network that pulls information from off-chain data sources.

Similar to crypto price oracles that pull data from off-chain centralized exchanges, SX oracles pull data from various Web2 data sources. This redundancy reduces risks that winning bets are nullified by a centralized operator, a common issue on centralized betting platforms.

Market Makers

Users can offer bets at whatever odds they like; however, a vast majority of users take the other side of an active offer. Alternatively, a vast majority of offers on SX Bet are created by market makers. Market makers are sophisticated participants that place multiple offers across several markets simultaneously.

Each market maker will independently determine a competitive bid at favorable odds. With several market makers operating across the platform, competitive forces help minimize their collective edge. This creates a platform with more attractive odds than traditional sportsbooks. Market makers also improve the product quality of SX Bet by increasing the breadth of available markets for users to bet on.

Decentralized Market Creation

Users can create new betting markets by inputting event details into the SX API or by inputting details into the sx.bet website. To create a new market, a user must input the following details:

• gameTime: start time of the event

• teamOneName: name of the home team

• teamTwoName: name of the away team

• sportID: identification number of the sport

• leagueID: identification number of the league

• type: type of betting market (i.e. ML, Spread, or Total)

Validators on SX Network approve new markets and record event information on the SX public registry. Once a market is live, users can start making offers or taking active offers. Most markets on SX Bet are programmatically created via an API from third-party market makers on the platform.

Figure 10: Market Creation on SX Bet

SX Bet Diversity

SX Bet offers a wide range of bets on dozens of leagues and sports. Additionally, SX Bet features exotic prediction markets, such as political events and crypto prices. New betting markets are frequently sourced from the broader SX community.

• Market Submission: Users can upload new markets to the SX registry by requesting events that meet specific criteria. For example, the event must cover a whitelisted league, i.e. major professional and colleague sports. Additionally, market submissions must cover three types of bets: over/under, money line and spread/handicap.

  SX is constantly increasing the number of sports and events supported for market submissions. In addition to whitelisted sports/leagues, SX recently began offering alternate lines, where users can bet on different spreads for a specific game.

Figure 11: SX Bet – Alternative Spreads

• In addition to sports betting, users can submit bets involving crypto prices, such as whether a token will reach a certain price within a pre-specified amount of time. Crypto markets can cover blue chip tokens BTC and ETH or memecoins like BONK or SHIB.

• Community Requests: For bets that don’t meet whitelisted parameters, SX also offers community requested bets. These cover more exotic bets such as who will win MVP or whether Trump or Biden will win the election. Many community requested markets are submitted within the SX Bet Discord channel.

  SX incentivizes community requests by offering bet credits to users with approved submissions. SX accepts user submissions every Wednesday and Friday, where users must submit event details. If a submission meets SX’s requirements, then markets are added to the public registry. Community members of approved submissions will earn bet credits equal to 0.25% for all betting action on their market.

• Parlays: SX Bet recently began supporting parlays, where users can place bets on multiple events at once to earn higher winning payouts. Parlays follow a similar structure as standard markets, where bets must meet whitelisted criteria. The peer-to-peer structure of SX Bet incentives users to offer parlays with attractive odds.

• Live Betting: SX Bet users can place bets before and during games. Because betting is permissionless, users can offer bets on a specific market throughout the game. More sophisticated users will constantly update bids throughout the game to offer the most efficient odds.

Promotional Offers

Both CeFi and DeFi wagering platforms use promotions and incentives to encourage usage and loyalty. SX Bet uses both traditional and Web3 incentives to offer a superior promotional model than CeFi platforms.

• Bet mining: SX offers “bet mining” where users can earn token incentives as rewards for wagering activity. Rewards are based on the value of a user’s winning bets rather than the value of total wagers. This model disincentivizes wash trading. During promotional periods, SX Bet will offer a fixed amount of tokens for bet mining per week. Users earn a share of the weekly rewards pool by winning a greater share of total bets during that week.

  Bet mining is a unique capability that can’t be offered by CeFi sportsbooks. SX Bet can offer token incentives via SX token or third-party tokens granted by L1 and L2 token foundations. By rewarding users with tokens instead of just bet credits, SX is offering users a share of protocol ownership. CeFi crypto betting platforms like Rollbit and Shuffle offer token incentives as well; however, these tokens don’t represent ownership in the underlying application.

• USDC bet credits: SX offers free bet credits to new and recurring users, similar to traditional sportsbooks like Bet365 and DraftKings. New users can earn up to $1,000 in USDC bet credits after they register their wallet and complete KYC. The $1,000 in bet credits are unlocked as users earn 2% cash back on every wager. Alternatively, users can choose to forgo the signup bonus if they skip KYC.

  SX also frequently offers USDC bet credits to existing users during promotional periods. Promotions typically occur during high profile events such as Super Bowl or March Madness. Users earn bet credits when they place a minimum wager on these marquee events.

Figure 12: SX Bet – Promotional Offers

Cross-chain wagering

SX Bet recently launched cross-chain wagering to expand its addressable market. The SX Bet DApp still exists on its own appchain; however, users can place wagers directly from other chains as well. Cross-chain wagering is currently supported between Arbitrum and SX Network; however, SX will launch cross-chain wagering across additional L1s and L2s in the coming months.

Rather than launch standalone versions of SX Bet across multiple chains, cross-chain wagering gives users access to a unified liquidity pool. While bets can be placed from various L1s and L2s, the unified liquidity pool exists on the SX appchain. This limits liquidity fragmentation while allowing users to place bets and receive winnings directly from other chains.

Users that place bets directly from SX appchain retain access to certain features, including live betting and parlays. This encourages more user activity within the SX ecosystem while cross-chain functionality helps expand SX’s addressable market. That said, cross-chain functionalities will increase after SX Network migrates to an Arbitrum Orbin Chain. After this migration, SX will support live betting across multiple chains.

Figure 13: SX Bet – Cross-chain Betting Functionality

SX also receives grants from 3rd party ecosystems such as Arbitrum when launching cross-chain betting. This allows SX Bet to jump start customers acquisition by offering token incentives to users of major L1 and L2 chains. In May, Arbitrum allocated 498,000 ARB tokens to SX Bet and we expect similar incentives each time SX launches in new ecosystems (more details below).

SX Network Ecosystem

• SX Network is attracting 3rd party DApp developers.

• The appchain hosts both GambleFi and DeFi DApps.

SX Network DApps

While SX Bet is the main DApp on SX Network, other developers are building in the ecosystem as well. 3rd party developers are building both GambleFi DApps and DeFi apps to complement the SX token and ecosystem. SX’s long-term vision is to become a hub for the GambleFi sector.

Tipster Protocol

Tipster is a SocialFi DApp that brings on-chain visibility to “Capping”. Capping is the practice of selling sports betting advice. Users typically pay Cappers a fee or subscription in return for Cappers’ betting picks. This practice has been around for decades; however, there’s limited transparency into the accuracy of a Cappers success rate.

Cappers often advertise their expertise by cherry picking recent successful bets rather than providing complete performance data. Given the limited transparency into checking performance, Cappers often embellish their winning percentages. New bettors are particularly susceptible to overzealous cappers, where it’s hard to distinguish a Capper’s true skill.

Tipster Protocol brings Web3’s transparency and verifiability to the Capping industry. Cappers on Tipsters use SX Bet to place bets and generate a track record, where each Capper’s performance and success rate is publicly verifiable. Tipster provides a database of Cappers’ records, allowing users to analyze performance thoroughly.

Figure 14: Tipster Protocol

Tipster Protocol shares similarities with friend.tech, where Cappers create tokenized access to Telegram Bots. Users buy keys to Telegram Bots to receive updates on the Cappers’ latest picks. Similar to friend.tech, each chat room has a limited number of keys, where users can buy and resell keys. This helps determine the market value of the Cappers’ advice.

Figure 15: Tipster Protocol – Tipster Coins

After a Capper mints a personalized token, they retain a portion of the supply. This creates an incentive to continue offering profitable advice, as successful Cappers can sell their tokens at higher prices. Cappers’ tokens are freely tradable on SharkSwap, an Automated Market Maker (AMM) DEX on the SX blockchain.

Tipster Protocol is developed by SX-Lab, an independent developer team. A share of each Cappers’ tokens are allocated to the SX-Lab team, as well as SX’s community fund. This helps Tipster Protocol drive value to SX Network, both directly and indirectly.

Copy Betting

An independent team is also building a copy betting DApp on SX Network, comparable to copy trading offered on CEXs like Binance. Copy trading allows users to monitor and replicate trades of other successful traders. Similarly, copy betting will allow users to track skilled bettors’ performance on SX Network and mirror their bets.

Unlike Tipster, copy betting occurs after the skillful bettor has made a bet. This allows users to automatically duplicate a savvy bettors’ strategy. Successful traders opting into the service will earn a share of the winnings made by those who copy their bets. This incentivizes skillful traders to opt in and continue betting profitably. This new DApp is expected to launch after SX Network transitions to an Arbitrum L2.

Quantzone

Quantzone simplifies the creation of quantitative betting strategies. Users can create automated betting strategies that place wagers once predefined criteria are met. Users without coding abilities can create these strategies via Quanzone’s UI. This empowers less sophisticated users to create more complex (and potentially higher frequency) betting strategies.

Titan Echo

Similarly, Titan echo is an upcoming application that simplifies the creation of complex market making strategies. Developing these strategies does not require coding experience and retail users can replicate sophisticated betting strategies used by market makers.

SX-Edge

sx-edge.bet highlights arbitrage opportunities between SX Bet and other sportsbooks. Due to SX Bet’s tighter spreads than CeFi sportsbooks, users can place bets between SX and Web2 sportsbooks. These cross-platform bets can offer favorable odds with positive expected values. SX-Edge continuously monitors SX Bet and Pinnacle (a leading CeFi platform) and highlights betting opportunities with positive expected values.

LiquiStake

SX token holders can stake SX to participate in governance and contribute to the security of the network. SX stakers also earn token rewards for supporting the native oracle network. That said, unstaking SX requires a 14-day lockup period which constrains SX liquidity and limits DeFi activity.

LiquiStake is a liquid staking protocol (LST) for the SX token. Users can convert SX tokens into stWSX to continue accruing rewards. stWSX tokens can be traded and staked in DeFi protocols. Similar to typical LSTs, LiquiStake accrues a 10% fee from staking rewards which is split between SX validators and the LiquiStake protocol.

SharkSwap

SharkSwap is a native DEX on the SX Network. Having launched in 2022, SharkSwap is a UniSwap V2 fork that brings an Automated Market Maker DEX to the SX ecosystem. The DEX currently offers liquidity pools for SX, USDC and WETH. SharkSwap also offers liquidity for tokens native to the SX network, such as SharkSwap’s SHARK token, stWSX and individuals tokens from Tipster protocol.

Figure 16: SharkSwap – Trading Pairs

Development Roadmap

• SX Bet is launching additional features to compete with CeFi sportsbooks.

• L2 migration and casino games can improve SX’s tokenomics.

Roadmap

SX’s roadmap includes new features and imporved user access. While Web3 UX is traditionally more cumbersome than Web2 sportsbook apps, SX is bridging this gap while leveraging Web3’s unique advantages.

Upcoming features include:

• Arbitrum Orbit Chain (Summer 2024)

• Cross-Chain Expansion (2H24)

• Casino DApp (Summer 2024)

• Cash Outs (2H24)

Migration to Arbitrum Orbit Chain (Summer 2024)

SX Network originally launched on Ethereum in 2019 before migrating to Polygon in 2021. In 2022, SX subsequently transitioned to a Polygon appchain using Polygon’s Edge SDK. By having its own chain, SX has more flexibility in prioritizing throughput while offering unique GambleFi functionalities such as a native Oracle.

In Summer 2024, SX expects to complete a migration into an Arbitrum Orbit Chain. SX Network will use Arbitrum’s optimistic rollup technology and an off-chain Data Availability network. This structure enables more secure bridging into the SX Network while retaining low transaction fees.

Figure 17: Arbitrum Orbit Chains

Cross-Chain Expansion (2H24)

After launching cross-chain betting on Arbitrum in March, SX Bet is expanding across additional EVM-compatible L1s and L2s. Because SX Bet is EVM compatible, SX Bet can deploy across multiple chains with relative ease. Additionally, because the SX L2 acts as a liquidity hub, SX Bet does not need to establish network affects across each chain individually.

The team expects to launch on over 5 chains by the end of 2024. Near-term candidates include Mantle (ByBit is an investor of SX) as well as L2s focused on non-U.S. users (such as Scroll and Mode). SX is also planning launches on emerging EVM compatible L1s like Monad and Berachain by the end of 2024.

Perhaps most importantly, SX Bet can tap into the marketing and ecosystem development efforts from each of these chains. Because SX Bet brings real user activity into ecosystems, SX Bet is an attractive DApp for token grants. SX has already received a 500k ARB grant from Arbitrum Foundation and we expect similar grants as SX Bet launches on additional L1s and L2s.

Casino (Summer 2024)

SX is rolling out casino games this summer to complement its sportsbook offering. Web2 gambling operators typically generate more revenue from casino products than sports betting. Rollbit, for example, generated over 5x more casino revenue than sports betting revenue over the past month.

Figure 18: Rollbit Revenue by Segment (30D)

SX is launching an on-chain casino by licensing games from a third party. The average win rate on casino games will be 2%. All revenue will be used to buy back SX tokens. Repurchased SX tokens will be reallocated to SX stakers for securing the native oracle network. This reduces the need for inflationary token rewards.

Cash Out (2H24)

Cash out functionalities allow users to withdraw bets after they’ve been placed. Cash outs are possible even if betting odds have changed since the original bet. This is a key feature offered by Web2 sportsbooks, where users can cash out more or less than the original bet depending on the latest odds. That said, CeFi sportsbooks typically offer cash outs at unfavorable terms.

Figure 19: DraftKings Sportsbook – Cash Out Function

Because SX Bet is a betting exchange, it can offer cash-outs at more favorable terms than traditional sportsbooks. Users will be able to trade in and out of specific bets as betting lines continuously move. This feature can significantly increase trading activity on SX as users trade in and out of specific markets. This feature is expected to become available in Fall 2024.

SX Community

• SX Bet’s user base includes crypto natives and traditional sports bettors.

• User activity is accelerating alongside cross-chain expansion.

SX Community

Since the initial launch of SX Bet in 2019, SX has attracted both crypto native and non-crypto native users. Its user base includes highly sophisticated market makers like Susquehanna Trading that are attracted by narrow VIGs. While prediction markets like Polymarket found success with political prediction markets, SX’s core user base is largely sports bettors.

As SX Bet continues expanding on new chains, better accessibility can help the DApp target a wider addressable market. User activity has already accelerated since launching cross-chain wagering on Arbitrum. Additionally, SX Bet is integrating with Web2 sportsbook aggregators that highlight SX Bet’s competitive odds to Web2 sportsbook users.

Figure 20: SX Bet – Monthly Active Unique Wallets

SX Network Community

• Monthly Active Wallets (2Q24 avg): 715

• Twitter: 29k followers (Link)

• Discord: 8.9k members (Link)

• Token holders: 4.4k (Token Terminal)

Tokenomics

• Protocol revenue accrues to SX token holders.

• SX token inflation will decline alongside upcoming upgrades.

SX Value Accrual

SX Bet historically accrues protocol revenue by taking a commission on winning bets. From 2019 to 2023, SX offered commission rates between 2% to 4%. This translated to a 1% to 2% take rate on total betting volumes. SX Bet also offered lower commission rates to SX stakers.

Figure 21: SX Bet – Monthly Protocol Revenue ($000s)

In March 2024, the SX DAO voted to suspend protocol fees to maximize growth during cross-chain expansion. Prior to that, protocol revenue was paid out to SX validators and SX delegators. SX stakers were earning a ~10% yield paid out in USDC. Overtime, SX developers plan to resume fees for less price sensitive users. SX Bet can reinstate fees on “taker” bets without disincentivizing market makers from providing liquidity.

In the near-term, the upcoming launch of casino games can also improve SX value accrual. 100% of casino revenue will be used to buyback SX tokens. This is a popular strategy among CeFi casinos like Rollbit and Shuffle, where casino revenues are used to remove a meaningful share of circulating supply.

SX token holders also accrue value via SX Network transaction fees. SX is the gas token of SX network, and the L2’s sequencer will generate gross profits from transaction fees. Sequencer profits will accrue to the DAO treasury. In addition, SX Bet wagers denominated in the SX token will accrue to the DAO as well.

SX Staking

SX is both a governance token and gas token. SX stakers participate in governance by voting on key changes to the protocol. Parameters include SX Bet’s fee switch and commission rates. Stakers also vote on how protocol revenue is distributed and how to allocate the community treasury.

The DAO treasury includes SX tokens that can be used for incentivizing network growth. The SX Community Fund currently has 375m SX tokens available for investment. That said, in June 2024, the SX community voted to burn 110m tokens from the community fund to reduce SX’s total token supply by 11% to 889m.

Token Supply

SX launched with a total token supply of 1 billion. Since launching in 2021, 81% of tokens are now fully vested. Unlike recent low float, high FDV projects, SX is less exposed to dilutive unlocks in the coming years. 92m SX tokens remain time locked with monthly vesting through February 2025. Meanwhile, ~1m tokens have been burned since SX’s burn program was initiated in 2022.

Figure 22: SX Supply Distribution

Token Emissions

SX emissions were historically used for bet mining and staking incentives; however, emissions will decline in the coming months. After SX migrates to an Orbit Chain, staking incentives are only needed for SX’s native oracle network. The migration reduces SX issuance to 13m per year, implying a 7% staking yield and a 1.5% inflation rate. This excludes the impact of casino buybacks that can boost staking yields higher.

Additionally, SX has steadily reduced its bet mining incentives over time. In June 2024, the SX DAO voted to suspend all SX bet mining incentives. Alternatively, SX is receiving token grants from L1 and L2 foundations. Rather than using SX tokens to incentivize usage, SX Bet can use 3rd party tokens to drive cross-chain betting adoption.

Peer Valuations Reflect SX Discount

• SX trades at a discount to peers, both on an absolute and relative basis.

• SX Bet’s migration to an Arbitrum Orbit L2 can accelerate volumes.

SX’s discount to Peers

We don’t believe SX’s current valuation reflects its growth profile or attractive tokenomics. Specifically, we see a mismatch between the FDV of SX and other prediction market protocols like Polymarket and Azuro.

Returning to Growth

SX Bet grew exponentially from 2019 to 2022, including $176m of betting volumes in 2022. However, user activity stalled after SX launched an appchain in September 2022. The SX appchain was built using the Polygon Edge SDK which uses sidechain infrastructure rather than a typical L2 or rollup.

Polygon Edge sidechains offer less efficient bridging than rollups, where SX relies on third-party bridging from Celer. This offers weaker security guarantees than typical L2s that are secured by fraud proofs or validity proofs on Ethereum. SX also relies on its own validators to secure its sidechain, unlike rollups that can leverage security guarantees of Ethereum and/or off-chain Data Availability layers like Celestia.

Figure 23: SX Bet – Betting Volume ($m)

SX token incentives have also declined since 2023 which has pressured betting volumes. However, token incentives are ramping back up as the DApp receives grants from L1 and L2 foundations. This starts with a 500k ARB grant (~$335k) recently received from Arbitrum Foundation. SX Bet recently launched a promotion offering $69,420 worth of ARB over a 4-week period.

Figure 24: SX Bet Mining Incentives ($000)

SX Bet can continue to reaccelerate usage after it migrates to an Orbit Chain and expands cross-chain betting. Cross-chain wagering from Arbitrum already contributes ~20% of total bets which helped push SX Bet volumes to record 2Q levels. As SX Bet launches on more high-profile chains, user activity can increase further as accessibility improves.

Figure 25: SX Bet – 2Q Betting Volume ($m)

Meanwhile, the upcoming launch of casino games can significantly accelerate revenue. Traditional Web2 sportsbooks historically cross-sell casino games to sports betting users. Flutter, the largest online gambling operator globally, generated ~40% of revenue from casino games last year. Alternatively, Rollbit generated ~70% of total revenue from casino products over the past 30-days.

Paring the Valuation Gap

SX trades at a discount to peers, both on an absolute and relative basis. SX’s closest comps are Polymarket and Azuro which are both decentralized prediction markets. AZUR currently trades at a $140m FDV. Polymarket raised $45m in a Series B on 5/19, and we believe the private investment round valued the protocol at over $200m.

SX currently trades at a 0.4x multiple to 1H24 annualized volumes. This compares to a 1.1x multiple for AZUR. Polymarket remains private but we believe a token would trade near a $1 billion FDV (implies a 1.4x multiple). SX trades at a discount to peers despite a strong tech stack, including much tighter odds than competitors. We also don’t believe its proprietary decentralized oracle network is reflected in SX’s valuation.

Meanwhile, both Azuro and Polymarket’s volumes are likely inflated alongside broader interest in airdrop incentives. Azuro volumes recently accelerated alongside the AZUR airdrop announcement. For Polymarket, the U.S. presidential election has contributed over 60% of total volumes; however, this should normalize lower in a non-election year.

Figure 26: Prediction Market Protocols ($m)

SX Bet has several catalysts to accelerate betting volumes and we believe a 1.4x FDV to Volume multiple seems reasonable. In fact, one could argue SX warrants a premium valuation given its greater decentralization versus peers. Particularly, SX offers a native decentralized oracle network while peers rely on centralized intermediaries for bet settlement.

A 1.4x FDV to Volume multiple would imply a $225m FDV for SX. With 889m tokens in circulation, this implies $0.25 per token. As SX ramps up marketing efforts as it launches across more L1s and L2s, we see an opportunity to accelerate betting volumes and push SX meaningfully higher. While SX remains relatively unknown within the Web3 community, these catalysts can help the protocol to gain wider recognition.

Long-term Value Potential

We outline a scenario where SX can reach a $500m FDV, which is still a discount to where we believe a Polymarket token would trade. We forecast a medium-term scenario where SX Bet facilitates $900m of bets per year. This is 5x higher than SX’s annualized 1H24 volumes and 4x higher than SX’s peak betting volumes in 2022.

Decentralized gambling DApps generate just 3% of the betting volumes as CeFi crypto casinos like Rollbit and Stake.com. If GambleFi can reach a 10% penetration, which is comparable to spot DEX penetration, this would imply $3.5bn in annualized betting volumes.

Meanwhile, SX maintained 16% market share in 1H24 among decentralized prediction markets. We see potential for market share gains as SX Bet expands casino games and launches on additional L1s and L2s. Cross-chain betting on Arbitrum already contributes 20% of SX Bet’s total volumes. If SX launches on 5 new chains that are 25% as productive as Arbitrum (on average), this would double SX’s total betting volume.

Our $900m volume scenario for SX assumes a $3.5bn GambleFi TAM and 25% market share for SX. We expect SX to eventually return its fee switch to ~2% of total betting volumes. Meanwhile, SX’s casino games will apply a 2% VIG when they launch this summer.

These forecasts imply $18m of annualized protocol revenue for SX Bet. A $500m FDV for SX implies a 30x multiple on protocol revenue. This 30x multiple is comparable to current price to sales multiples of established DeFi protocols like Lido, DyDx and Aave.

Figure 27: SX FDV Potential ($m)

Upside from L2 Premium

Longer-term, SX Network has potential to transition from a standalone appchain to a more generalized L2 for GambleFi. As more 3rd party GambleFi DApps launch on SX Network, an increasing number of transaction fees will accrue to SX token holders. This can increase the premium on SX’s valuation, as the protocol accrues value from both the SX Bet DApp and broader L2 transaction fees.

Risks to SX

• SX faces intense competition from both CeFi and DeFi wagering platforms.

• SX Bet is exposed to regulatory risks related to both crypto and gambling.

We highlight key risks that may limit SX Network’s broader adoption, as well as risks related to protocol security. In a bear case scenario, SX could trade as low as $0.04 which implies a 10x multiple on SX’s protocol revenue in 2023.

• CeFi & DeFi Competition: Competition among online gaming applications is intense, where SX competes against both DeFi and CeFi platforms. Many competitors have significantly larger treasuries than SX. As such, it may be difficult for SX to compete for user and developer activity if it’s unable to offer incentives comparable to peers.

• Regulation. Gambling is a highly regulated industry, and regulation is a key deterrent for decentralized prediction markets. Governments are typically reluctant to regulate crypto transactions, while compliance procedures can be more difficult when dealing with decentralized organizations. This has limited many DApps to gray markets. SX Bet’s front-end does have a gaming license in Curacao; however, higher compliance standards could restrict SX Bet relative to peers who largely operate without gaming licenses.

• Bugs & Exploits: SX Bet is a seasoned DApp that launched on Ethereum Mainnet in 2019. While SX Bet has been audited and has never experienced a hack or exploit, there could be unforeseen risks after the protocol transitions to an Arbitrum Orbit Chain. Additionally, 3rd party DApps building on SX Network could be vulnerable to exploits, such as an $1.8m exploit to SharkSwap in 2022.

• Centralization. It’s difficult to build a sports betting app that’s entirely decentralized. While we believe the SX protocol is more decentralized than GambleFi peers, there’s still areas where SX could decentralize further. SX Bet’s orderbook remains off-chain, and cross-chain wagering remains centrally managed. The SX team has plans to decentralize these components over time; however, this could bring unforeseen limitations.

• Core Team: SX’s core team includes just 7 full time developers, and the project is meaningfully influenced by its co-founders. Any events that lead to team members leaving the project, particularly its co-founders, could impair the future development of the protocol.

• Liquidity. SX tokens maintain lower trading liquidity than many digital assets. Lower liquidity could offer higher trading volatility and limit investors’ ability to unwind positions.

Core Contributors

SX’s core team consists of 13 full-time contributors, including 7 developers. The project was initially formed in 2017 by its 3 co-founders based in Canada.

• Andrew Young, Co-founder & CEO: Andrew leads SX’s strategy, roadmap, marketing and investor outreach efforts. Prior to co-founding SX, he worked on the trading floor of Bank of Montreal (BMO). Andrew earned a Business Degree from Western University in Ontario.

• Julian Wilson, Co-founder & CTO: Julian leads SX’s technology development including blockchain architecture and developer management. Prior to co-founding SX, he worked on the ETF desk at BMO as a Data and Full-Stack Engineer. Julian earned a Computer Engineering degree from Queen’s University in Ontario.

• Jake Hannah, Co-founder & COO: Jake leads SX’s operational functions while contributing to SX’s growth strategy. Prior to SX, he worked in operations at Canadian Imperial Bank of Commerce (CIBC). Jake earned a Business Degree from Western University in Ontario.

Important Disclosures

The following disclosures relate to relationships between Altcoin Research Limited “Alts RSCH” and the digital assets referred to in this research report.

This report has been prepared by Altcoin Research Ltd which is a consultancy business registered in Hong Kong. All content was produced independently by the author(s) and does not necessarily reflect the opinions of the developers whose protocol is covered in this report. Altcoin Research receives referral fees from third-party Virtual Asset Service Providers (VASPs) that do business with the foundations and core contributors of the digital assets referred to in this report. Referral fees paid to Altcoin Research are variable and based on activities between VASPs and respective token projects. As a result, investors should be aware that Altcoin Research may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making an investment decision..

General Disclosures

This research report is for professional investors and for informational purposes only.  This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.  Any opinion expressed in this report is subject to change without notice and may differ or be contrary to opinions expressed by other professionals or business areas of Altcoin Research.  We are under no responsibility to update our research.

The views expressed in this research report accurately reflect the publishing analyst’s personal views about the subject digital assets.  No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in the research report.

The author of this report has a long position in the digital asset referred to in this report. Our affiliates, officers, and directors will not execute on any trades until at least 48 hours after the dissemination of this report. Altcoin Research Limited as a business entity does not take long or short positions in, and buy or sell, the digital assets or derivatives thereof of tokens referred to in this research report.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.  It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.  The price and value of the investments referred to in this research and the income from them may fluctuate.  Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.  Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

© Copyright 2024 Alts RSCH

No part of this material may be copied, photocopied, or duplicated in any form by any means without the prior written consent of Altcoin Research Limited.