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

SALT LAKE CITY — As Kyle DiPeppe sees it, crypto's prediction market fad has a looming expiration date: Nov. 5, 2024.

Election day will bring judgment for hundreds of millions of dollars in bets placed on the U.S. presidential contest and the myriad other political races that have turned sector leader Polymarket into a massive success. Once these races are decided, so will their prediction markets, leaving their bettors with a win or a loss.

What happens then? Will bettors keep prognosticating when the quadrennial Super Bowl of prediction markets is over?

Probably not, says DiPeppe, an attendee at the semiannual mtnDAO hacker house gathering who runs far-smaller competitor Hedgehog Markets. He reckons that 90% of prediction markets trading volume is "all around politics," and will likely evaporate when this cycle is over, as it has before.

DiPeppe mused: "Once November 6 hits, is there enough liquidity" to keep market makers and other behind-the-scenes players sufficiently interested to support trading on prediction markets? He doubts it.

To weather the coming drought, Hedgehog Markets is building a type of prediction market that is less tradeable, but in his view more enduring than Polymarket's binary shares-based model for highly publicized events, which needs a lot of liquidity to work as designed.

Hedgehog focuses instead on the "long tail" of bettable events that have fandoms willing to put money on their favored outcome but aren't too concerned about trading their position. It's more similar to sports betting experiences prevalent on DraftKings and FanDuel, where bettors take a gamble on odds and let it ride, than a stock market.

"There's clearly people interested in sports betting. It's all short-term, same thing with crypto: It's a lot of memecoin, short-term trading," DiPeppe said. "So how do we cater with a market type that fits this shorter-term time frame?"

Roll your own

Doing away with stock market-type trading gives Hedgehog more flexibility in engaging its user base, said DiPeppe. For example, users can spin up custom prediction markets, place their own bet on the outcome, and hope someone else takes them up on the opposite point of view. (Polymarket allows community members to suggest markets in its Discord server, but the company decides which ones to publish.)

DiPeppe thinks the same mindset behind memecoin factory Pump.Fun's success could pay dividends with custom prediction markets. There, any community can create a token in seconds and release it into the world where people trade it for "fun." He thinks there's fun to be found with prediction markets too.

Custom prediction markets come with potential minefields. What happens when someone creates a betting market in which the outcome differs from the contemplated scenarios? (For example: a tie game where bettors only thought one team or the other could win).

There's no clean way of resolving things when the prediction market is built atop a market maker or order book, according to DiPeppe. Even returning the pot 50-50 between opposing sides – a solution that might feel most fair – ends up rewarding those who bought in at, say, 20% odds, while punishing those who took 80%.

Hedgehog's dispute resolution is cleaner, DiPeppe argued. A custom-made market that ends in purgatory can simply return the same amount of money to bettors that they originally put in, he said.

Another potential problem: what if insiders play their own market? Perhaps someone created a market asking whether, say, a presidential candidate will mention the word "potato" onstage at a debate? Such a market might catch some bets from people thinking it to be unlikely (or from people who think otherwise).

What if the candidate places a bet in that market, too? If they know what they're going to say, then they could place a large bet based on the insider information. Would that not be insider trading?

Yes and no, said DiPeppe. Prediction markets are all about using trading to seek the truth. If someone who knows the truth trades on it, then other market participants, and bystanders among the general public, will become better informed.

"Anybody could launch their own NFT collection, anybody could launch their own meme coin. Will communities want to do the same thing?" with prediction markets, DiPeppe asked. He's betting on it.