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While regulated sports betting is catching on like wildfire across the US, it is a slightly different story for esports betting. Sport and esport are not always recognised as one and the same in state gambling legislation, which means there are several states where sports betting is legal and esports betting is not. Esports and gaming have burst into the mainstream in recent years, transforming from a vibrant niche to a central form of entertainment around the world, and ticket sales are transitioning.

[toc]Gambling on – and around – esports is a much bigger market than many assume.

The market can basically be divided by product and then by currency. Let’s start by talking a bit about the currencies that underpin gambling on esports.

Esports gambling: Popular currencies

For esports gamblers, the currency choice comes down to a decision between cash and skins (virtual items from video games).

Daily Fantasy Esports in the US

Cash requires little explanation. The market for cash gambling on esports works identically to the cash-based market for traditional online wagering, such as sports betting or online casino games.

Skin betting on esports

Skins require a bit more explanation. Skins are virtual items that can be used in games like Counter-Strike: Global Offensive (CS:GO). The term “skin” is derived from the typical function of these virtual items: changing the appearance of a player’s in-game avatar, weapons, or equipment.

While a number of games employ some sort of skin system, CS:GO skins are the dominant currency in the skin betting market, accounting for over 80 percent of total wagering activity.

For example: Below is an image of the “stock” knife used as a weapon in CS:GO. Players can opt to replace that stock knife with unique skins of the knife that change the appearance of the knife, as shown in the images to the right of the stock knife.

Note that the skins do not improve the functionality or power of the knife. The skin only changes the appearance of the knife. Skins play a purely cosmetic role.

CS:GO skins can be easily transferred between players (the same is not true for all games). That condition allows skins to act as a quasi-currency – something like a casino chip. Given that ability to move skins between players, layering a gambling site on top of that ability is a relatively easy task.

Here’s how it works:

• Players “deposit” a skin at a skin betting site (popular types of sites include sportsbooks, lotteries, roulette, and coin flips) by transferring the skin to the skin betting site.
• They gamble using their deposited skins (or in some sort of internal currency that the player receives in exchange for their skin).
• If they win, they’re paid in additional skins, which they “cash out” by requesting that the skin betting site transfer skins back to the player.

Once players have skins in their Steam account, they can:

• Leave the skins dormant in their inventory.
• Use the skins to change the appearance of their weapons.
• Trade skins with other players.
• Sell skins on the Steam marketplace for Steam credit (not cash) that can be used to buy other skins and games via Steam.
• Exchange skins for cash on third-party sites outside of Steam.

Right now, skin gambling is far more popular than cash betting, but a crackdown on skin gambling activity by CS:GO publisher Valve could fundamentally undermine the ability of skin gambling sites to operate.

Esports gambling: Popular games

A few basic types of gambling dominate the esports gambling market.

Sports betting

Sports betting represents the most popular product among esports fans. Betting on esports is more or less identical to betting on traditional sports, with the caveat that the esports betting product is far less developed than the traditional sports betting product.

Players can choose between cash-based or skins-based sites when betting on esports matches.

In terms of popular games, as the chart below suggests, real-money League of Legends betting leads the pack, but CS:GO betting is a close second (and closing ground, according to our analysis):

Fantasy esports

While markedly smaller than sports betting on esports matches, there is nonetheless a demand for fantasy esports.

Most of the sites serving this space deal in cash betting. The major players are just who you’d expect when thinking about daily fantasy sports; you’ll find fantasy esports at DraftKings.

The basics of daily fantasy eSports

Fantasy eSports sites offer some variant of the “salary cap” model, in which users select a roster of players for their fantasy team under the restrictions of a salary cap set by the site. After picking a team, the eSports competitors score fantasy points for users based on their performances in competition. The users that end a contest with the most fantasy points win cash prizes.

The types of contests offered in fantasy eSports generally mirror those of traditional fantasy sports:

• Guaranteed contests (top entries receive part of a guaranteed prize pool)
• Head-to-head matches
• Winner-take-all contests
• 50-50 contests (contests where half the field is paid)
• Double- or triple-up contests, where players win 2x or 3x their buy-in
• Qualifiers for other contests
• “Leagues” (any contest that is not guaranteed, but is not a two-player contest)

Contests are available across the three sites on a variety of popular competitive video games:

• League of Legends
• Dota 2
• Counter-Strike: Global Offensive (csgo)
• Hearthstone: Heroes of Warcraft
• Call of Duty
• SMITE

Jackpot games

Jackpot games are basically lottery-style games that allow players to risk a small amount for a chance at a large payday.

Right now, jackpot games are only available at skin betting sites, but it makes sense that cash betting sites would start to offer some equivalent product in an attempt to attract skin gamblers – especially if Valve’s crackdown succeeds in choking off the skin betting market/

As the chart below shows, jackpot games formed the second-most popular segment of skin betting activity after sports betting (note that estimates are prior to Valve’s crackdown).

Casino-style games

A handful of casino-style games (including roulette, blackjack, and raffles) make up the majority of the remaining interest in gambling among esports fans.

Again, these games (at least within an esports-dominated frame) are only available at skin betting sites. The market for these (and all) skin betting products is in flux following Valve’s decision to crack down on the activity.

The U.S. Supreme Court on Monday struck down the Professional and Amateur Sports Protection Act (PAPSA), which prohibited states from authorizing many forms of sports gambling. This is a landmark decision for the sports-betting industry, which now unlocks one of the largest gambling markets in the world. For nearly 26 years, Nevada has been the only state in the U.S. allowed to offer a wide array of popular sports-betting options. In 2017, $4.8 billion was wagered at Nevada sportsbooks, though an estimated $150 billion was illegally wagered on sports by Americans that same year.

In the wake of the Court's decision, the far-reaching ramifications on the sports industry are being analyzed and overanalyzed, with official statements already being released by MLB, the NFL, the NCAA and many other key stakeholders.

Meanwhile, in our video gaming corner of the world: virtual radio silence. No comments from the League Championship Series, Overwatch League or any other major esports league.

Make no mistake, the court's decision will have a profound impact on the development and growth of the esports industry. Let's get into the how, when and why.

The decision

Esports Gambling App

The pivotal line from the court's decision reads: 'Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.'

As a result, states are now free to regulate sports betting as they see fit. New York, Pennsylvania and West Virginia are among the states expected to legalize sports betting imminently, with many more to follow. One research firm estimates 32 states will likely offer sports betting within five years. The contour of these laws remains to be seen, but it's important to note there won't be a national policy on this issue for the foreseeable future; instead, operators will be forced to comply with piecemeal, state-based legislation.

The current state of esports betting

It has been nearly two years since Narus Advisor published the last comprehensive analysis of the size and scope of the esports-betting marketplace, but its most recent report concluded that $5.5 billion worth of cash and in-game items would be wagered globally on major esports titles in 2016. That same report estimated this number would grow to $12.9 billion by 2020. Notably, the majority of this betting occurred through the use of in-game items such as betting currency. But both the growth curve and the predominance of skin betting was in a world with PASPA on the books.

Speak to any major betting operator -- online or brick and mortar -- and they're thinking deeply about how to capitalize on the explosive growth of the esports industry and the correlating increase in wagering on esports events. A few major sportsbooks already offer lines on esports matches. By the time the dust settles from this decision, virtually all of them will.

Viewed in this light, the lack of more recent data is troubling. Like the industry itself, esports betting is poised to explode, and we've barely wrapped our heads around the scope of the betting that's already occurring.

The future

Whether you like it or not, esports gambling is only going to get bigger. This simple fact must frame the entire debate surrounding the role of wagering in the esports industry.

Is Esports Gambling Legal

The esports industry is at an important crossroads: We need to decide whether we're going to embrace the rise in esports betting or try to shun gambling altogether.

Gambling has its problems, to be sure -- chief among them are threats to competitive integrity, addiction and underage betting. These issues, coupled with the stigma surrounding gambling in the U.S., are the primary reason why many traditional sports leagues have historically chosen to prohibit any affiliation with betting. And while some esports teams/competitions have taken on betting sponsorships and worked with groups such as the Esports Integrity Coalition, the largest operators in the industry -- Blizzard-Activision and Riot -- have thus far shied away.

This approach seems defensible; gambling can be harmful, and major brands don't typically want to be affiliated with such harms. However, all of these negative externalities are magnified when league operators refuse to participate in the ecosystem.

Is Esports Gambling

This is why NBA commissioner Adam Silver has flipped the league's position on gambling; it's not that he's pro gambling, he's just a realist, and he wants to use the NBA's leverage to promote a system that includes mandatory monitoring and reporting of unusual betting-line movements, a licensing protocol, age verification, geo-blocking technology, mechanisms to identify and exclude people with gambling problems and education about responsible gaming. The NBA has also proposed the imposition of an 'integrity fee,' which would require operators to pay a percentage of the gambling handle on league games to allow the league invest more in compliance and enforcement actions.

The best part about the rise of esports is we get to learn from of our stick-and-ball predecessors. In some cases, following traditional sports is the right way to go and there is no need for us to reinvent the wheel. But when it comes to gambling, traditional sports in the U.S. have gotten this issue wrong for decades, and the smarter leagues are finally shifting course. I want to live in the world Adam Silver envisions, and we don't have to massively course correct to get there -- we can build it from the ground up.

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Monday's decision is a watershed moment for sports, and it can be for esports, as well. Let's seize the moment, capitalize on the growth of esports betting as a means to enhancing growth for the industry itself, and implement an industry-wide effort to combat the potential problems that will result from increased wagering on esports in the U.S.

Esports Gambling Industry

Remember, gambling on esports is happening whether we like it or not. The real question is if we're going to ignore the problem or become a part of the solution.