Despite the fact that the ICO fever was riddled with low-effort frauds, the enthusiasm was anchored in the actual promise of blockchain's application layer to alter the computer sector. No endeavor is more representative of this era than Augur. Augur raised $5.5 million in Ethereum's first ICO to construct the world's first decentralized prediction market. Augur, like the bulk of subsequent ICOs, has become a symbol of crypto's transformational promise and failed expectations.

As Vitalik points out in his blog article "Prediction Markets: Tales from the Election," prediction markets continue to be low-hanging fruit for crypto disruption. Decentralized prediction markets (DPMs) provide useful insights while also incentivizing the battle against information asymmetry. Crypto's key pillars of decentralization, trustworthy neutrality and censorship resistance are necessities rather than buzzwords for an effective prediction market.

Thales is using the potential of parimutuel markets to create simple derivatives, prediction markets, and sports betting. This article will examine what distinguishes Thales from its predecessors and assess its potential as a killer app.

Synthetix ecosystem overview and introduction to parimutuel markets

Synthetix is a derivatives platform that allows users to create and trade synthetic assets (also known as synths). The collateral pool is made up of SNX stakers, who are allowed to coin sUSD, which may be swapped for other synthesizers. With Chainlink oracles, these synthesizers are tied 1:1 to their associated crypto, fiat, equities, or commodities. Synthetix is able to onboard a diverse range of assets due to the nature of synthetic assets, avoiding slippage, liquidity bootstrapping, and other overhead expenses that hinder the growth of nascent protocols.

synthetix eco

Source: Synthetix

Synthetix broke out the Thales community as the scale of their binary options product increased to warrant a specialized crew. Thales and Synthetix have a strong association, with significantly overlapping communities, a republic-style DAO structure, and sUSD as its primary collateral.

Instead of a centralized bookmaker, parimutuel markets pit players against one another. The bets are collected into a pool, which is then shared among the winning team. Rather than the more usual set odds structure, odds are a function of pool balance. Bets are represented by positional tokens, which are valued using the Black-Scholes Model by the Thales Automated market maker (AMM). Winning positional tokens are worth one dollar, whilst losing positional tokens is useless. Parimutuel markets provide a simple alternative to derivatives such as ordinary options and perps.

Thales products

Positional Markets: enables users to forecast whether the price of a crypto asset will be higher or lower than the strike price on a certain date. These locations are represented by positional tokens that are either UP or DOWN.

Ranged Markets: made up of several UP and DOWN positional tokens that enable users to forecast whether an asset's price will fall inside a certain range at maturity. Positions are denoted by IN or OUT tokens.

Positional and Ranged Tokens: may be used to simulate more complicated options strategies in plain English. Ranged markets are a simple way to avoid buying and selling straddles. The odds pricing mechanism and capped loss/upside give a simple, modular approach to options trading. Arbitrum and Polygon have also implemented positional marketplaces.

Thales Royale: a binary options tournament based on the concepts of Fortnite and Squid Game. Thales Royale has been incorporated as a free-to-play marketing gimmick as well as a season structure, with mint pass NFTs acting as the admittance fee.

Exotic Markets: use the flexibility of parimutuel markets to enable users to design markets for any query with a valid data source. The community resolves disputes in a fair and trustworthy manner. Political elections and COVID-19 data have proved to be excellent use cases for unusual markets and have played an important part in Polymarket's success.

Overtime Markets: Thales Royale and Exotic Markets have been put on hold while the company works on its newest product, Overtime. This product, which provides positional parimutuel markets for sports, is gradually becoming Thales' flagship offering. Overtime enables users to engage in decentralized sports markets without having to register or provide KYC. Using reliable Chainlink feeds, Overtime imports odds from Web2 sportsbooks like Pinnacle and DraftKings. As a result, Overtime can accommodate a wide range of sports, leagues, and bet kinds. Overtime is currently only accessible on Optimism.

The weakness of the current prediction market

The World Cup brought a flood of demand to online sports betting platforms worldwide, and Overtime capitalized on the chance. Overtime produced $1.6 million in World Cup volume, accounting for about 30% of total volume so far. A significant portion of the World Cup volume has been preserved, with the average daily volume being 77% greater than before the World Cup.

Bad UX - Augur included a novel crowdsource reporting approach, depending on its native token REP to incentivize rational conduct by market producers and resolvers. Although it was a fascinating experiment for decentralization purists, the needless friction and complexity drove everyone else away. This awkward UX was exacerbated by high Ethereum mainnet fees and the volatility of ETH used as collateral.

Impermanent Loss (IL) - Augur v2, Polymarket, and Omen signaled a transition to Constant function market maker (CFMM) for the second design wave of prediction markets. The AMM experience's simplicity and the emergence of sidechains/L2s relieved UX concerns. Polymarket used house money to seed its liquidity provider (LP) in order to grow; however, the antagonistic LP environment resulted in poor sustainability.

Impermanent loss has diverse effects on various AMM use cases. Liquidity provision is a positive delta position in a vanilla CFMM like Uniswap v2 and should be treated as such. The presence of IL on an options AMM is troublesome, although it is solvable via fees or other changes. Traditionally, realized volatility has been lower than indicated volatility, which helps options LPs compensate for IL risk.

Prediction markets, on the other hand, are usually settled spontaneously by exogenous triggers. A great player's injury, a third-quarter interception, or the withdrawal of a political contender might essentially end their respective markets, leaving LPs on the hook.

flaw in current market
Source: Polymarket

This issue is so severe that Polymarket has urged customers to remove money as markets reach a resolution. One side resolves at 0 and the other at 1, occasionally at random. As a result, supplying liquidity is a fool's errand. Because of impermanent loss, CFMMs are entirely useless for prediction markets and sports betting.

Oracle front running - Blockchain applications depend on oracles like Chainlink to combine real-world data into smart contracts. Oracles aid in market resolution and pricing in prediction markets. Oracle latency allows users to front-run Oracle updates to the disadvantage of LPs. Oracle front running and impermanent loss are two major challenges that exacerbate each other.

Lack of Liquidity - The aforementioned factors lead to Augur, Polymarket, and others' inability to develop and use liquidity in a sustainable manner. As a consequence, prediction markets have become more specialized.

Polymarket focused on specialized sectors like esports and political elections. At times, this method worked brilliantly, with the 2020 election and COVID-19 anchoring Polymarket's breach of $200 million in total volume. Volume was erratic in most markets, and traders continually pushed LPs despite the impermanent loss. Polymarket mitigated this by functioning as a significant liquidity source with little transparency into its performance.

Augur focused on sports but was never able to generate significant liquidity. There are just a few marketplaces in Augur at any one moment. Peer-to-peer systems have too many trade-offs and need separate liquidity pools for each market. Because of the poor performance of prediction market LPs, bootstrapping liquidity for a complete offering is a very difficult undertaking.

The regulatory framework for prediction markets is very tough to manage. In the United States, sports betting restrictions differ by jurisdiction. This has hampered the expansion of sportsbooks in the United States, like DraftKings and Barstool, since they must customize their offering to audiences in various states. Instead, they use workarounds such as daily fantasy sports, which are not subject to the Unlawful Internet Gambling Enforcement Act (UIGEA).

Broader, all-encompassing prediction markets, on the other hand, must exercise caution to avoid seeming like an unregistered derivatives exchange. Polymarket was quickly subjected to a regulatory crackdown after being the first on-chain prediction market to establish product-market fit.

Polymarket paid a $1.4 million fine and barred American users from accessing the site after reaching an agreement with the Commodity Futures Trading Commission (CFTC). PredictIt, another platform that has been running well for almost ten years, will be shut down in February 2023.

Kalshi, a new Web2 prediction market set to open in spring 2023, has spent significant efforts obtaining CFTC clearance to run a derivatives exchange. By acting as a derivatives exchange, Kalshi's event contracts get countrywide access. Although legally possible, Kalshi will not sell event contracts on sports wagers since it would relinquish its nationwide blanket authority. Kalshi's involvement in the actions against Polymarket and PredictIt has been the subject of conjecture.

What Thales can solve?

After launching on Ethereum mainnet, moving to Optimism provided additional design possibilities in the future. Thales created a unique AMM built exclusively for binary options in order to offer assured liquidity and control for the deficiencies of CFMMs. The AMM is built on the Black-Scholes model, which algorithmically prices positional tokens depending on the likelihood of each eventuality succeeding. Implied volatility is imputed manually. However, Chainlink will import it once implied volatility feeds are available.

As long as safety restrictions are met, the Thales AMM enables on-demand liquidity for positional tokens.

A per-market risk limitation restricts the AMM's exposure to a certain market. Risk limits may be changed for various sports, leagues, asset categories, and so on.

Odds Range - To account for unusual edge situations, the AMM includes pricing range limitations of 0.05-0.95 USD.
Time Limit - The AMM ceases to provide liquidity 24 hours after maturity.

For the time being, the project treasury provides AMM liquidity while the team iterates on public liquidity provision.

Overtime Markets modifies the Thales AMM to accommodate various outcomes. Thales' business approach is similar to that of casinos and sportsbooks, which secure long-term profit via vigorish, or "vig." The vig is simply a profit margin that may be programmed. The vig is visible and may be computed using any of the conventional odds techniques, although it is most easily calculated using normalized implied odds. Adding implied odds for an outcome will usually result in 1.05. This indicates that the house earns a 5% profit on all bets, bringing in $105 and paying out $100. Since the vig "penalty" is split into both sides of the bet, in order to defeat the house, one must win 52.65% of their bets.

Sportsbooks attempt to manage their exposure to each event in order to smooth returns and reduce downside risk while consistently collecting the spread. This is clearly more challenging for a decentralized prediction market that is currently building its user base. Thales employs a skew impact price to balance exposure within a market. The skew effect may be beneficial or negative, increasing the cost of positions that have disproportionate exposure to an outcome and offering discounts to positions that balance AMM positioning.

Thales' approach to on-demand liquidity centered on a reference point is an intriguing design technique. Thales' AMMs, unlike peer-to-peer alternatives, may support several markets with the same liquidity. The risk cap and skew effects enable the AMM to market in risk units rather than token prices. This implies that the AMM has potentially infinite capital efficiency as long as a pool's risk exposure stays under the risk cap.

Assume the risk cap is $5,000. Taking costs and skew into account, the AMM would be able to sell around 10,000 options for a position with a 50/50 probability. The AMM's capital efficiency would be relatively bad in the rare case of one-sided demand for a longshot result. Yet, with the skew effect capable of changing prices by +/- 10%, clever bettors are likely to come in and buy the underbought side. Thales has been able to sustain $20M in volume from $350,000 in liquidity planted across positional markets, ranging markets, Overtime, and parlay AMMs because of this dynamic.

A skew impact mechanism is not a novel notion in AMMs, but it can be done more smoothly using this approach. In other cases, dynamic charge methods impose a new cost on customers, resulting in unexpected rates and a bad user experience. The skew effect in this example may be seen as a shifting of the vig, which is a well-established and acknowledged feature of oddsmaking.

Thales imposes a Safebox fee on all transactions to safeguard the AMM's liquidity in the event of a shortage. The Safebox fee is essentially a trading-funded insurance fund. Surplus Safebox fee money has been allocated to THALES token buybacks, which are continuing.

Thus far, the Safebox charge has been beneficial, enabling Overtime to always maintain a positive profit/loss. Without the Safebox charge, the AMM would have been operating at a loss for at least two months. AMM profit/loss without the Safebox charge is critical for monitoring the model's viability as the team moves towards permissionless liquidity providing. In the meanwhile, Thales vaults provide an alternate way for users to get access to the AMM.

Thales vaults take sUSD deposits from users and execute automated trading methods on their behalf. These vaults operate similarly to buy-side DOVs, enabling market-agnostic customers to get exposure to the AMM's +EV nature. The AMM does not charge a vig for vaults, making the advantage of discounted positions even more evident. In contrast to common DOVs, Thales vaults give a unique advantage (bypassing vig, trading bots discovering discounts) and assist in the critical work of controlling AMM risk. This symbiotic interaction has not been seen in other vaults. Other vault designs often conceal the real risk profile and levy rent-seeking costs for simple-to-implement tactics.

Thales vaults are available across the Thales AMM and Overtime. One disadvantage of Thales AMM vaults is the significant correlation between markets, which is not present in Overtime.

In comparison to Polymarket, Thales vaults, and very transparent AMM performance stand out. Thales is iterating towards permissionless liquidity providing in the open with its community. According to TIP-99, public liquidity supply would most likely occur in rounds and will resemble the design of Lyra v1. Thales has already gone further than any other DPM in developing a long-term, scalable liquidity solution.

Forecasted Growth in the industry

The online sports betting business is expanding, and existing market leaders are fighting for market share as the lucrative sector develops. Bet365, the world's top sportsbook, has seen its earnings fall by 88% owing to an increase in client acquisition expenditures and administrative expenses. This precipitous reduction occurs despite a strong 15-20% rise in the sports betting industry, with a 48% increase in clients.

Although most of the globe has accepted sports betting, it is still illegal for the vast majority of individuals in the United States. Just 18 states have legalized sports betting, accounting for 44% of the population. This will most likely help Thales get into the American market. Major US bookmakers are engaged in a turf war for new clients as more permissive regulation expands to new states.

The two major US sportsbooks, FanDuel and DraftKings, invest heavily in order to expand and preserve their market share as the US sports betting TAM expands. Thales offers an outstanding range of innovative, efficient, crypto-native client acquisition strategies.

Fee Rebates - Thales offers fee reimbursements in the form of OP and THALES tokens. This enables Overtime to claim the "best odds in the business" (net of fee rebates).
Incentivized Markets - Thales takes advantage of the sports calendar's cyclicality by designating a considerable percentage of its OP to rewarding markets during critical events. Markets for the World Cup and NFL playoffs have benefited from Overtime.
Monthly Parlay Leaderboards - Each month, the top 20 parlays (based on the number of positions and total quote) get a share of 10,000 OP tokens.

Thales has a revolutionary on-chain referral scheme that allows users to earn 0.5% of every recommended volume straight to their wallets in sUSD.

Overtime flex cards are a simple and visually appealing method to highlight huge accomplishments on Twitter or other social media channels. They also give referral connections in the form of QR codes.

Volume Prediction

Thales' ability to use carefully chosen, less aggressive marketing approaches have already proven effective in attracting crypto-natives. With just 44% of US people legalizing sports betting, expansion in the US should be quite easy. It needs to be seen if the tactics outlined above are adequate to enroll average consumers all over the globe who have access to a credible alternative. Over time, it may become dependent on crypto cycles to help in its global expansion. Arbitrage potential provided by the AMM's skew mechanism, as well as the associated discounts, are another lever that may drive volume. Thales' positional and ranging markets are expected to expand in lockstep with the DeFi options industry.

Annualized revenue for individual items under zero growth. There is no volume spike from the Super Bowl or March Madness. Exotic markets are still on hold.

From 2018 to 2022, FanDuel grew at an 84% CAGR. Thales began with a smaller base and has grown into a much bigger market, therefore a 130% short-term growth rate is realistic. The options industry is growing at a 40% annual rate. Exotic markets return for the 2024 election, accounting for half of Polymarket's 2020 election activity.

Overtime will expand at a Uniswap-like rate of 800% in 2023 and 400% in 2024, based on the bull case. The growth rate of options remains constant at 80%. Exotic markets are reinstated for the 2024 election, matching the volume of the 2020 election. Overtime debuts on Arbitrum and Polygon, with a similar proportion of Optimism volume as the Thales AMM.

Performance forecast

Thales' positioning markets have underperformed. This is explained by growing pains as Thales perfects its binary options pricing algorithm without the benefit of Chainlink feeds for implied volatility. Thales had artificially high IV values early on, but the market settled gently. This enabled users of the popular "crab" tactic to charge a high premium for optionality. IV is obtained via Deribit for ETH and BTC. The IV values of other assets are calculated using historical volatility versus ETH. The AMM choices' performance should increase with time. Early on, most options AMMs deal with mispriced IV.

The sportsbook industry is doing well, but there is still space for growth as it develops. The typical gross revenue margin for sportsbooks varies between 5-9%. For example, FanDuel's revenue is regularly 6% of their handle. Straight bets have a 5% hold, whereas parlays may have a 30% hold. We should not expect parlay performance to converge with the industry average because of its completely collateralized nature and unique reward distribution.

The AMM excels in sports and leagues with tight margins and great volume. A baseball club resting their ace, an NBA veteran sitting out back-to-back games on a road trip, or even a bad weather prediction might change a market's odds in a way that doesn't trigger an oracle update but weakens the AMM's EV position. In certain cases, Oracle front running may penalize the AMM. Long-term, reducing oracle front running and improving integration with oddsmakers might raise gross revenue margins to industry norms and open up new growth prospects.

In-game betting accounts for 68% of all online sports betting, according to Bet365. Further work is required to adequately service this market. Oracle's front-running makes in-game betting a tough and time-consuming challenge.

Reduced Oracle latency will let more innovative products compete with the Web2 sportsbook stack. In-game betting, player props, and single-game parlays correlate to the upper end of the Web2 margin range and will help Us come closer to the targeted 5-9% margin range altogether.

With this in mind, we can create plausible scenarios for how volume may convert into AMM profit/loss.

F1 and MotoGP have been put on hold until changes are made to make the company more viable. For the time being, collisions, grid penalties, and qualification ramifications make F1 a headache to manage. The key reason for MMA's dismal success was unofficial MMA contests with bad odds.

Parlays are definitely a more successful company, but owing to the complicated collateralization structure, we do not expect parlay's performance to converge with industry standards.

Bear Case: The 3.3% sportsbook profit will continue indefinitely. The performance of options stays close to breakeven.
Base Case: With some early problems ironed out and the successful parlay industry on the upswing, a 4% revenue margin in 2023 seems to be the most plausible. Profit will climb to 5% in 2024 as higher volume, and fine-tuning mitigate the downside. In 2024, option performance will rise to 1%.
Bull Case: When MMA and F1 results are excluded, Overtime profit/loss is 3.6% (4.2% when parlays are included). Since these concerns seem to have been resolved, this baseline, together with the same growth as in the base scenario, may support a 5% margin in 2023 and a 6% margin in 2024. The performance of options rises to 1% in 2023 and 2% in 2024.

Prediction for THALES Token Fundamentals

thales tokenomics

Source: Thales

On Optimism, Thales uses a gamified staking scheme for THALES token holders. Users may earn up to 30% more staking rewards by utilizing the platform in a variety of ways, including SNX staking, trading volume, vault deposits, and participation in Thales Royale.

Thales management authorized the use of Safebox fees to purchase and burn THALES. Profits from the Thales AMM have been used to supplement the Safebox repurchase contract on occasion. To date, 1.6% of the available THALES supply has been used. Future Safebox fees may be calculated using the volume projection above.

Over time Safebox fees account for 2.1% of the total volume. This is far less than the current 3% Safebox cost. The stepwise growth from 1% to 3% over time, as well as the Overtime AMM not charging Safebox costs to the parlay contract, may explain this. Thales AMM Safebox fees are 2.75% of volume since the stepped progression has no effect on them. Since the parlay>Overtime dynamic is expected to remain, sportsbook Safebox costs are predicted to be 2.1% of volume.

In 2023, $1.2M in Safebox fees would represent 8.5% of THALES' current $14M market value. To properly understand the ramifications, examine the THALES emission timeline as well as the anticipated Safebox charge effect on token dilution.

It should be noted that AMM earnings have been utilized to supplement the Safebox repurchase contract. This was not included in the prediction since it is entirely at the discretion of Thales DAO, and liquidity provision will soon be available to users.

The figures produced from the volume prediction above are used in the bear, base, and bull instances, which have no unique assumptions.

Safebox fees are expected to make a significant dent in THALES inflation. THALES buybacks at present prices will counteract inflation by 17% of emissions this year. THALES investors will have very little to worry about in terms of dilution by 2024, with buybacks expected to reduce inflation in half or essentially eliminate it, depending on your reasoning. THALES is quite likely to become a deflationary token in 2024.

These data, however, should be taken with a grain of salt. The initial intent of the Safebox charge was not to pursue a deflationary supply and better token fundamentals. The Safebox charge was implemented to safeguard AMM from bankruptcy in the case of a shortage. Once the THALES price climbs, Safebox fees may move to sUSD incentives. If AMM performance improves, the Safebox charge may be reduced as well. Nevertheless, a drop in the Safebox charge may be countered by an increase in volume and reimbursement via other ways. Considering the success of positional and ranging markets, the Safebox charge is likely to be implemented in the short to medium term.

Key obstacles

Regulation Threats - The Synthetix ecosystem has long been lauded for its commitment to decentralization and resistance to censorship. While the Synthetix ecosystem is as prepared as any to tackle regulatory issues, it has never been put to the ultimate test. Thales' success will raise the probability of regulatory pushback.

Thales has done a tremendous job with parlays, but there is still a long way to go in establishing a truly comprehensive product. Owing to the constraints of Oracle front running, Thales may depend on Web2 collaboration to overcome this and expand the product offering with player props, in-game betting, and so on.

Thales obtains its extremely competitive odds from the finest Web2 sportsbooks. Thales may claim the greatest odds in the business since it is now rebating 90% of costs via THALES and OP incentives. Thales has done an excellent job of developing innovative, non-frothy use cases for its token, but it must avoid utilizing it as a crutch in the long run. Tuning the skew effect to balance AMM efficiency with competitive odds will be critical in order to gradually phase out fee rebates and compete with top sportsbooks for the best odds organically.

Exotic markets have been put on hold for the time being while the team concentrates on Overtime. This is due, in part, to the impossibility of the peer-to-pool structure for this market, which has resulted in some of the same historical liquidity concerns that have plagued DPMs in the past. Moreover, the community's responsibility of resolving disputes and monitoring market development restricts its scale. As AI technology advances, integration with the Chat-GPT API may offer a scalable mediator and rule enforcer for unusual marketplaces. For the time being, though, the concept of a one-stop shop for binary options, exotic markets, and sports betting is seductive but out of reach.

Conclusion

Thales has made significant progress in an otherwise dormant area of cryptography. Buy-side DOVs, parlays, and Thales Royale are all one-of-a-kind, exclusive developments in the crypto space so far. Thales has a one-of-a-kind mix of a counter-cyclical business strategy and a novel leverage vehicle. This should make it easier for Thales to gain crypto-native users, but onboarding regular users will need a more deliberate effort.

While concerns about the LP mechanism persist, Thales has proved that it is one of only a few initiatives with the disruptive potential of Uniswap. Events like the World Cup, COVID-19, and presidential elections, as we've seen with Polymarket, provide intermittent surges of viral demand for prediction markets. Thales is well-positioned to profit from similar situations in the future.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Thales: A new hope for the parimutuel market