Can Prediction Market Boom Continue After Election? This Crypto Team Has a Plan

On the day of the election, there will be a verdict on billions of dollars worth of wagers placed on the U.S. presidential race and various other political competitions that have made sector leader Polymarket highly successful. When these races are concluded, their prediction markets will also reach a decision, resulting in either a win or a loss for the bettors.

Once the four-year Super Bowl of prediction markets has concluded, will sports enthusiasts continue to make predictions about future events?

According to DiPeppe, an attendee at the semi-annual mtnDAO hacker house gathering, who also manages a smaller competitor called Hedgehog Markets, he believes that about 90% of the trading volume in prediction markets is mainly centered around politics. He predicts that this trading volume will likely disappear once the current cycle ends, as it has done so in the past.

DiPeppe pondered: “Will there be enough market liquidity after November 6 for market makers and other hidden players to continue supporting trades in prediction markets? He’s not certain.”

To sustain through the upcoming dry spell, Hedgehog Markets intends to construct an alternative form of prediction market that, compared to Polymarket’s binary share model for widely-known events, is less tradable but believed by them to be more resilient. This new design might not require the same level of liquidity as the original to function effectively according to its intended purpose.

A hedgehog primarily concentrates on less common events with dedicated fan bases ready to wager on their preferred outcome, rather than obsessing over the details of trading positions. This approach resembles the betting experiences found on platforms like DraftKings and FanDuel, where bettors make a bet based on odds and leave it to chance, as opposed to the more complex world of stock market investments.

It’s evident that there are many individuals drawn to sports wagering and cryptocurrency. Both are primarily focused on quick gains, as is common with meme coins in crypto and short-term trading. The question then arises: How do we create a market structure that aligns with this shorter time frame?

Roll your own

DiPeppe stated that eliminating traditional stock market trading offers Hedgehog greater freedom when interacting with its user base. This means users can create personalized prediction markets, express their own opinions by placing bets on the predicted outcomes, and anticipate that someone else will take a conflicting stance. For instance, Polymarket allows community members to propose markets in their Discord server, but the company ultimately decides which ones get published.

DiPeppe believes that the approach used by Pump.Fun, the memecoin factory responsible for its success, could prove profitable when applied to custom prediction markets. With these platforms, anyone within the community can quickly generate a token and launch it into circulation, allowing individuals to trade it for amusement. He sees potential for similar enjoyment in the realm of prediction markets as well.

Creating custom prediction markets can present tricky situations, particularly when the actual result deviates from the anticipated possibilities. For instance, if a betting market is set for a game that could end in a tie but the bettors only considered one team would win.

In simpler terms, as stated by DiPeppe, it’s challenging to find a straightforward resolution when the prediction market is structured around a market maker or an order book. A seemingly fair solution like splitting the pot evenly between opposing sides might not be equitable because it would favor those who initially bought in at longer odds (like 20%), while disadvantaging those who later entered at shorter odds (such as 80%).

According to DiPeppe, a hedgehog resolves disputes more effectively. He proposed a specially designed market where if it leads to a dead end, also known as ‘purgatory’, it would refund the exact amount of money initially betted by the participants.

An additional concern that arises is: what if market insiders manipulate the market by betting on their own predictions? For instance, suppose someone sets up a market asking whether a presidential candidate will utter the word “potato” during a debate. This market could attract bets from individuals who believe it’s an unlikely event (or those who think otherwise).

Suppose the candidate decides to invest in that particular market as well? If they possess inside knowledge, they might consider making a substantial investment. Isn’t that essentially engaging in insider trading?

DiPeppe replied with a affirmative and negative: In essence, prediction markets aim to uncover the truth through trading. By having individuals with accurate information participating in these markets, other investors as well as onlookers from the broader public can gain increased knowledge.

Inquiring about community trends, Decenrieux (DiPeppe) wonders if people will follow suit and create their own NFT collections or meme coins. His speculation leans towards a positive response.