In the world of sports betting, instant payments and reliable custody are key to the user experience. HotStreak, a web3 platform for daily fantasy sports (DFS) contests, is wagering that the decentralized nature of the blockchain makes it an ideal solution for DFS platforms.
The sports betting market in the U.S. has grown rapidly as states begin loosening regulations around the industry. It doubled in size in 2021, with over $52.7 billion total wagered over the year, according to Morning Consult.
There are two major issues with large sports betting platforms like FanDuel today, HotStreak CEO Greg Dean told TechCrunch in an interview. The first is that as a player, "getting your money in and out is extraordinarily painful," he said, because payouts are tethered to legacy payment systems such as ACH transfer that require the user to trust the counterparty against whom they are betting on the platform to actually distribute funds to them.
While users experience the friction of slow-moving, centralized payment systems, operators bear the brunt of building and maintaining their own proprietary currencies on-platform to facilitate payouts, Dean said.
The team behind HotStreak's web3 sports betting protocol. Image Credits: HotStreak
"When you talk to somebody and you explain that [for] billion-dollar companies like FanDuel, when you open up their tech stack and you look inside, you see an on-ramp, proprietary wallet, a proprietary digital currency and a proprietary ledger, all kind of maintained by this centralized, trusted authority. I think we're going to look back at that and kind of laugh at the industry a little bit," Dean said.
From the operators' perspective, he added, creating these payment systems creates overhead.
"It's just a huge inefficiency in terms of operating the business. Really, what they want to do is build good products that users want to use, not become an on and off-ramp for fiat, or for a proprietary digital currency," he added.
HotStreak's decentralized SHARP protocol aims to tackle both sides of the issue from a payments and custody perspective by facilitating near-instant payments and handling custody of assets based on a set of rules pre-determined within the protocol itself rather than relying on counterparties to initiate payments to other players. The settlement period for payments on its platform is 10 seconds, according to the company's website.
HotStreak raised ~$1.5 million for its seed round in May last year, largely from angel investors who Dean said are "huge crypto enthusiasts." Today, the company announced it has brought in an additional $9 million in funding for a Series A round led by crypto-native VC firm Polychain Capital, a new investor in HotStreak.
The product has evolved significantly since the seed round, Dean said. HotStreak's team plans to use the new funding to further develop its own platform as well as the underlying protocol on which it runs, he continued.
"When we raised our first round, it was more just based on the technology that we're building for the DFS product, which is basically a bunch of neural networks that price the short durations of sporting events," Dean said.
The company has seen $3 to $5 million worth of transactions per month on its platform this summer and is profitable today, Dean said, though he did not share specific numbers regarding revenue or profitability.
FanDuel co-founder and CEO Nigel Eccles, who invests in and advises numerous sports betting businesses, is joining as chairman of the startup's board as part of the Series A, which could help the company stay connected to opportunities to work with other companies in the space.
HotStreak itself makes money both from the entry fees it charges players to use its platform, which it says are listed on the app at the start of each game, and plans to monetize its software by selling it to other sports betting platforms, according to Dean.
Dean and his team aren't the only founders who have recognized room for blockchain-based innovation in the sports betting space. Last month, BetDEX, a startup co-founded by ex-FanDuel execs including Eccles, debuted its own Solana-based sports betting protocol, armed with $21 million in funding it raised last year from Paradigm and FTX. BetDEX is more focused on bringing down fees in the space, while HotStreak is focusing its efforts on improving payments and custody processes.
"There's an opportunity here to build something that can really change the industry and change the way people interact with sports gaming in general, because it really just doesn't make sense that you'd go give your money to some centralized person to hold on to just in case you wanted to make a bet or enter a DFS contest," Dean said.
While Dean admitted that the overall market for DFS providers could shrink as more U.S. states bring legalized sports betting online, he believes the overall sports gaming market is still set to grow significantly. Focusing on DFS to start gives HotStreak a regulatory advantage, he explained, although the platform will likely expand into offering more traditional sports betting products, which typically require more expensive legal disclosures.
HotStreak doesn't spend much on marketing, an activity Dean described as "incinerating" cash. Instead, the company is focused on relentlessly iterating its user experience.
"If you've been in crypto long enough, it kind of feels like a lot of solutions looking for a problem. This is perhaps like one of the more concrete examples of a real existing systemic problem in an industry, where a web3 protocol could change that and drastically improve things," Dean said.