Can just anyone create a site where lets say the users pay $1 to chance winning $10,000? is this illegal?
You're in murky water. The idea is not new. It's call Internet casino. States are finding ways to deal with these. For many states, [traditional] gambling is illegal. [Traditional] casinos have a love-hate relationship with these Internet casinos. On the one hand, they are afraid of the young competition; on the other hand, they want to join them to share the profit! Who knows where this will go 10 years from now.
For now, if you want to operate one of these, you have to do it offshore, and it'll be tricky. On the one hand, you don't want the states [that ban gambling] to catch you; on the other hand, you want to pay your taxes (so that the IRS will allow you to continue to live in the US). OR, just move offshore and don't plan to come back!! OR, get a competent lawyer.