Thales: The architecture for parimutuel markets and derivatives

September 26, 2023

In conclusion

If you asked a good sample size of crypto natives what crypto’s biggest use case is, you are likely to uncover a myriad of perspectives and responses. However, while doing some research to bring today’s discourse to your plate, a particular reply showed up multiple times, albeit in various nuanced forms. 

One said: 

“Speculation is still crypto's biggest use case. Nothing wrong with that, but that's not sustainable”

Another put it this way: 

“But crypto's biggest use case is still ‘betting', which is still a use case, or no one would use Draftkings or go to casinos.”

Lastly, this person put it this way:

“iGaming is crypto’s biggest use case”.

Frankly, the above comments only point to one thing: ‘Parimutuel markets and speculative/prediction gaming markets’.

Moreso, considering that through this bear market, we have seen “Punting” takeover mainstream crypto, we can almost say that these folks are on to something. 

Take, for example, Rollbit’s wild success in the bear market generating almost $2M daily in revenue despite being a centralized gaming platform with a cosmetic touch of “Crypto”. Somehow, it has succeeded in attracting quite a lot of liquidity. 

What we will be covering today is not the first parimutuel project we are covering this year, as we’ve introduced you to “HXRO network and Iconic markets”, domiciled on Solana. Regardless, this one is really special, so sit tight, and let's get into it!

What the Heck is a Parimutuel market

Parimutuel markets simply connote “Betting together” wherein participants pool their bets into a single pool, in a winner-versus-loser format such that the total pool size is determined by the sum of contributions from all bettors across all outcomes. It is important to state that the nature of a parimutuel market is more often than not, predictive, albeit wagering is done by pooling together individual bets into a single communal betting pool.

Considering the above, it becomes evident why cryptocurrency is tailor-made for such markets, and why some folks would think it to be crypto’s biggest use case. Any predictive market involving the consolidation of wagers into a unified pool demands a high degree of transparency, liquidity, effective decentralization, neutrality, and resistance to censorship – all of which can be achieved through a unique design on the blockchain, dependent on the approach. It is, therefore, within this context that the Thales architecture finds its relevance in parimutuel and custom markets.

The Thales design

Thales can be viewed as an offshoot of the Synthetix protocol, originally stemming from binary options. It emerged as a separate project after successfully winning a proposal to take on the project as a separate adventure, gradually evolving into a groundbreaking Automated Market Maker (AMM) that fuels Parimutuel markets. 

Fundamentally, Thales operates as a binary options protocol facilitating speculation on cryptocurrency prices through derivative contracts. Interestingly, the inclusion of sports in its scope was inspired by the passionate interest of some of its key contributors. Today, Thales serves as the breeding ground for various predictive markets functioning through the parimutuel betting mechanism of unified pools, all of which we will delve into in more depth as we proceed. 

How Thales works is simple; Special smart contracts are created for each market with a novel AMM built on top to seed liquidity to these markets. The outcomes of an event are represented by a “Positional token” allowing individuals to make bets wherein the odds are determined by the balance of the pool unlike in the traditional settings where odds are affixed after statistical analysis based on recent performances. 

Thales has developed 4 major AMMs, all with unique capabilities tailored to their type of markets whether binary options crypto derivatives or sports prediction markets. They are: 

  • ThalesAMM - the classic crypto derivatives up or down
  •    
  • RangedAMM - Built on top of ThalesAMM, allows for ranged trades between two strike prices such as IN or OUT
  •    
  • SportsAMM - Same tech as ThalesAMM but revolves around using chainlink pre-game odds data to price Sports Positional Tokens compared to ThalesAMM algo pricing of options
  •    
  • ParlayAMM - built on top of SportsAMM to allow combining multiple single games from SportsAMM to leverage

Thales custom AMM overcomes the shortcomings of regular AMMs in a lot of ways, as the adoption of existing AMM designs would expose protocols built on the AMM to indispensable issues such as impermanent loss, oracle front-running as a result of latency issues, and poor liquidity. Thales AMM is developed using an adaptation of a Black-Scholes model — a model specific to binary options that calculates probability and prices Thales Positional Tokens algorithmically based on Distance to Strike Price, Distance to Maturity Date, and Implied Volatility index.

Thales AMM also implements programmable profits also known as “Vig” to generate returns and stay on the profit side. It does this by taking a little extra from every bet. To win against it, you’ll need to be right more than 52.65% of the time because the 5% profit is taken from both sides. 

To enhance liquidity for positional tokens across various parimutuel markets within the Thales architecture, Safety mechanisms are implemented to manage risks. These safeguards include risk caps, odds within the range of 0.05 to 0.95, and a time limit of around 24 hours from maturity. 

The Liquidity provided on Thales AMM serves as collateral for payouts on positions, albeit, in the event that there is a shortfall, Thales charges a SafeBox fee (2%) which acts as an insurance cover. Liquidity provisioning on Thales functions by $Thakes holders depositing sUSD. 

Moreso, in the event that too many people are betting one way, the system makes overbought bets more expensive and offers discounts for bets that balance things out. This mechanism is called “Skew Impact” and can be either positive or negative. 

Another important aspect of the design is that Thales offers Vault services, accepting sUSD deposits and deploying capital to diverse Buy-side strategies with zero fees. 

Thales’ sports AMM powers one of the flagship products, Overtime markets offering odds for up to 22 leagues where users can place bets on three outcomes: Home win, away win, or Draw. Just like the Thales AMM powering the crypto derivatives market, positional tokens are created based on the player’s selection and collateralized by the AMM. Overtime markets utilize chainlink to keep in touch with games in order to settle bets.

Also, Thales architecture powers parlay bets where multiple positions are combined into a larger bet, through the Parlay AMM over-collateralizing individual positions in a parlay. This is because individual bets are multiplied in order to determine the maximum payout of the set of games. 

In order to understand how the Thales market works, let’s consider this scenario: Imagine a user who is eager to place a bet on a sports event, let's say a Tennis match featuring the legendary Nadal and the formidable Djokovic (by the way, a devoted fan of Djokovic). The outcome of this match is a binary choice: either Djokovic wins or loses. In other words, if Djokovic doesn't emerge victorious, it automatically signifies a win for Nadal.

Now, when this user wishes to make such a bet through a Thales-powered bookie, the platform issues them a positional token based on their selection of the winning side. When the event reaches its conclusion, those holding the winning positional tokens can claim their prizes, while the positional tokens aligned with the losing outcome expire worthless. 

A user wants to buy a $50 “Novak WIN” position to potentially win $100

AMM takes $100 from the LP pool and mints 100 “Novak WIN” and 100 “Nadal WIN” positions

AMM takes $50 from the user and sends him 100 “Novak WIN” positions, keeping the “Nadal WIN” positions within the AMM

If the game resolves as Nadal wins, the users’ “Novak WIN” tokens expire worthless, and “Nadal WIN” tokens are exercisable for $1 each.

AMM exercises its 100 “Nadal WIN” tokens for $100 —> AMM is up $50

The beauty of this is savage degenerate bookie patrons like you and I don’t get to see behind the scenes as all of this stuff happens behind a cosmetic frontend where it doesn't get past simple friendly buttons and wallet confirmations to place bets and redeem winning pots. 

Thales architecture powers a range of distinctive parimutuel markets:

  • The Thales market: In this market, users can speculate on the direction of the price of a crypto asset at a particular date. 
  • The speed markets: This is basically the Thales market but on steroids, as the timeframe is shorter. Users can predict the direction of an asset within 24 hours. 
  • Overtime markets: This is a web3 sports book and Thales flagship product that offers competitive odds on sports events 

Thales is deployed on Optimism and Arbitrum and has just launched on Base as well. Thales utilizes its $OP allocation as well as $thales which is the native token of the protocol to offset fees thereby making the markets more attractive. At the moment, liquidity provisioning to the Thales AMM is limited to $Thales Stakers. 

Closing thoughts

Thales is modified to allow for easy integration by any third-party protocol building a better UX and incorporating the Thales AMM architecture to power liquidity and offer the best odds. This alone speaks to the huge potential Thales has to become the most liquid layer in all of web3, simply because of how gigantic the betting industry is. Moreover, web2 sports books could potentially adopt Thales architecture given that they already provide for good user experience. 

Thales AMM and its design set it apart as the sole on-chain parimutuel engine that empowers markets with complete transparency, fairness, and robust liquidity, mitigating the uncertainties associated with unpaid transactions. In my opinion, should crypto’s biggest use case turn out to be betting, then, Thales is strategically primed to become the powerhouse behind that. You also cannot shake the feeling that for as long as the Rollbit narrative stays alive, the $Thales token will respond positively to a corresponding upside in RLB.

To get started, you can explore the various live markets on Thales or my favourite part which is to try out the Overtime web3 sports book and probably play some games, which could potentially qualify you to receive some $Thales or $OP incentives. You can also choose to buy $Thales in order to deposit sUSD into the Thales AMM or provide liquidity for the Overtime AMM.

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