The Rise of Prediction Markets in Crypto

Prediction markets have emerged as one of the most compelling use cases for cryptocurrency, offering a permissionless way for users to put their money where their mouth is on various outcomes. In a recent episode of Unlayered, hosts Saul and Dave sat down with Kyle Samani, CEO of Hedgehog, to discuss the current state and future potential of prediction markets on Solana.

Hedgehog, a prediction market platform built on Solana, has been in development for several years. The project aims to bring many of the features popularized by platforms like Polymarket to the Solana ecosystem, offering users a fast and low-cost way to participate in crypto betting markets.

The Evolution of Hedgehog

Kyle Samani's journey with Hedgehog began in a VC incubator, where he initially joined the project in an operational role. As the crypto market entered a bear phase and the original founder decided to pursue other interests, Samani took the reins and steered the project through various iterations.

Initially focused on NFTs during Solana's boom, Hedgehog pivoted as the market changed. The team experimented with free-to-play models and polling apps before returning to their roots in classic prediction markets. This shift coincided with increased activity on Solana, including token airdrops and rising TVL (Total Value Locked) in DeFi protocols.

Prediction Markets vs. Meme Coins

One interesting comparison raised during the discussion was between prediction markets and meme coins. While both serve as speculative vehicles, they differ significantly in their mechanics and outcomes. Samani explained:

"Prediction markets in the sense of like a binary option style, where there's sort of a resolution or an outcome, are in a way easier for non-crypto native people to also grasp. People can kind of understand the context, they can understand the data, and they can actually gather insights from that."

In contrast, meme coins lack clear parameters for success and are driven more by pop culture and sentiment. This makes it challenging to extract meaningful data or insights from meme coin price movements alone.

The History of Prediction Markets

Prediction markets have existed in various forms before the advent of cryptocurrency. Platforms like Predictit operated in regulatory gray areas, finding loopholes to allow US participation. However, recent regulatory pressures have forced many of these platforms to exclude US users.

In the crypto space, prediction markets were mentioned as a potential use case in the Ethereum whitepaper. Projects like Augur pioneered on-chain prediction markets, though they faced challenges with clunky interfaces and settlement times.

Challenges in Measuring Market Volume

One of the key challenges in the prediction market space is accurately measuring and comparing volume across different platforms. Samani highlighted the discrepancies in how various platforms report their trading volumes:

"If you look at other platforms, they report volumes a little bit differently. So I haven't paid too much attention, but for example, if you go to Calche, they report it based on like, I want to say like either contracts or shares or something. And so I don't know exactly how they counted and, you know, what the dollar value is."

This lack of standardization makes it difficult to make direct comparisons between platforms and assess the true size of the market.

Regulatory Landscape for Prediction Markets

The regulatory environment for prediction markets remains complex, particularly in the United States. Platforms like Kalshi have emerged as fully regulated, KYC-compliant options for US users. However, these regulated platforms face additional hurdles:

"I believe that each market there is sort of set up as its own like futures market. So they have to get CFTC approval for each market that they put up and that sort of situation. So it is, you know, by the book, a little bit more cumbersome to get things up."

This regulatory overhead can limit the speed and variety of markets that can be offered on compliant platforms.

Hedgehog's Approach to Market Creation

One of Hedgehog's key differentiators is its focus on permissionless market creation. Samani explained the challenges and potential solutions for allowing users to create their own markets:

"The way we're kind of, I guess, approaching it at a high level to take us that back is that we, we, we are aiming to create a fully permissionless and on chain way to create, participate and resolve markets."

This approach presents challenges, particularly in ensuring clear resolution criteria and preventing spam or poorly worded markets. Hedgehog is exploring various market structures to address these issues, including pooled predictions and para-mutual style markets that can be more easily unwound if there are disputes.

The Importance of Regular, Evergreen Markets

A key insight from the discussion was the importance of regular, "evergreen" markets to sustain user interest and platform growth. Samani acknowledged the challenge of relying solely on event-driven markets like elections:

"We know that, you know, after November 5th, what's next, right? Because right now, the majority of poly market in the news is around election stuff. It's nothing else."

To address this, Hedgehog is exploring markets around sports, crypto prices, and other regularly occurring events. The team is also developing innovative market structures like pooled parlays, which allow users to predict multiple outcomes in a single bet.

Integrating Yield for User Incentives

One innovative approach Hedgehog is taking to differentiate itself is the integration of yield-generating mechanisms into its markets. Samani explained:

"We have integrated yield into the USDC that's being deposited for our pooled markets and our pooled parlays and our peer to peer markets. And the goal is because they are more short term, the interest for the specific user for that short time period isn't that interesting. However, we do plan to use that interest to basically give it back to the users in other manners."

This approach allows Hedgehog to offer additional incentives to users, such as referral rewards, without relying on token emissions or external funding.

The Solana Advantage

Building on Solana provides Hedgehog with several advantages, including fast transaction speeds, low fees, and a growing ecosystem of users and developers. Samani emphasized the importance of the Solana community:

"We absolutely love the Solana community. Like, there's just better and better tools that are coming out every day."

The team is leveraging Solana-native tools like Tiplink to improve onboarding for non-crypto users, though challenges remain in simplifying the process of acquiring the necessary tokens for transactions.

Mobile Strategy and App Store Challenges

While mobile access is crucial for widespread adoption, crypto prediction markets face significant hurdles in getting native apps approved on traditional app stores. Samani explained Hedgehog's approach:

"For us, it's really just designing our platform to make sure that all aspects are mobile optimized as well. So the goal is that if you do still have a phantom wallet or soul flare wallet, or if you do want to use the tip link option, you could just load our website in your wallet browser or just, you know, on the browser on the phone and be able to log in and still do everything that you would do on desktop."

This web-based approach allows Hedgehog to maintain compliance while still offering a mobile-friendly experience to users.

The Future of Prediction Markets on Solana

As Hedgehog continues to develop its platform, the team is focused on introducing new market types and improving the user experience. Samani highlighted the upcoming launch of pooled parlays:

"We're aiming to get those live for the NFL season, where basically you would have, you know, those weekly parlays where you can predict all of the games and then, you know, move that into other things as well. So whether it's UFC, you know, fighting where there's eight matches in a day, you could do a one day parlay just for UFC, whether it's crypto prices daily or weekly, whether it's esports."

These innovations, combined with Solana's growing ecosystem and Hedgehog's focus on user-friendly design, position the platform to potentially capture a significant share of the crypto prediction market space.

Addressing Concerns About Prediction Markets

While prediction markets offer exciting possibilities, they also raise concerns about potential negative impacts. Some critics argue that prediction markets could pose a threat to democracy or encourage harmful behavior. Samani addressed these concerns:

"I understand what he's saying, we're, with prediction markets. Um, I have seen just interesting takes and tweets where, um, it's like, okay, how much is being predicted versus how much is what we're predicting driving outcomes as well."

He acknowledged the potential for markets to influence behavior but emphasized the value of bringing data and numerical analysis to complex topics.

The Challenge of Long-Tail Markets

One area where prediction markets have struggled to gain traction is in long-tail topics like media and content creation. Samani offered his perspective on why these markets have been challenging:

"I think it's, it's when you get to these long tail markets, there's just not a lot of liquidity or interest or information available, or like expertise, I guess. Um, so like people having that information. And, and so if you have one or two experts, they're going to exploit all of the people that don't know much."

To address this, Hedgehog is exploring alternative market structures, such as no-loss competitions that leverage yield-generating mechanisms to create interesting betting opportunities without the risk of users losing their principal.

Competing with Established Players

As a relatively new entrant in the prediction market space, Hedgehog faces competition from established platforms like Polymarket. Samani outlined Hedgehog's strategy for differentiation:

"We don't currently have any outright incentives to draw people to trade. So for example, with Blair, we sort of saw people knowing that they were accruing these points for a token eventually. And so I think, you know, right now, I think people are speculating on, will there be a token for polymarket?"

Instead of relying on token incentives, Hedgehog is focusing on creating a more user-friendly, on-chain experience and introducing innovative market types to attract users.

The Importance of Solana's Ecosystem

Building on Solana provides Hedgehog with a significant advantage in terms of user experience and existing community. Samani emphasized this point:

"I think the Solana community and especially with with the growth and, you know, people actually that have used the chain and see how easy and smooth the user experience is compared to some other L2s or Ethereum. You know, we think that that definitely gives us an advantage as well."

This existing ecosystem of users familiar with Solana's benefits could provide a ready-made audience for Hedgehog's prediction markets.

Onboarding Non-Crypto Users

While focusing on existing Solana users provides an initial target market, Hedgehog is also exploring ways to onboard non-crypto native users. Samani explained their approach:

"We are hoping to kind of also drive the side of how can I get my friend that's not crypto native onto the platform. So we have, you know, integrated tip link. I know you guys had them on the podcast a little while ago. And so like we have that like Google login option with tip link."

However, challenges remain in simplifying the process of acquiring the necessary tokens for transactions, particularly for users new to cryptocurrency.

The Role of Prediction Markets in Society

Throughout the discussion, Samani touched on the broader implications of prediction markets for society. He emphasized their potential to provide valuable data and insights:

"I feel like that's just kind of how I've always operated, you know, coming from a background in finance, always being fascinated, um, by how the banking system works, even if it is rigged in a, in a lot of ways. Um, but that's part of the system that we're in, right? So you kind of have to play by those rules, unfortunately. And so if, if, uh, if you can have a way to experiment and play around with that, I always think it's fascinating. And when you can bring data into the mix, even better."

This perspective highlights the potential for prediction markets to serve as a tool for understanding complex systems and aggregating diverse opinions.

Conclusion: The Future of Prediction Markets on Solana

As Hedgehog continues to develop its platform and introduce new market types, it's clear that prediction markets have the potential to become a significant part of the Solana ecosystem. By leveraging Solana's speed and low fees, integrating innovative yield mechanisms, and focusing on user experience, Hedgehog is positioning itself to capture a share of this growing market.

The challenges ahead, including regulatory complexities and competition from established players, are significant. However, the team's focus on permissionless market creation, innovative market structures, and integration with the broader Solana ecosystem provides a strong foundation for growth.

As the crypto industry continues to evolve, prediction markets like Hedgehog may play an increasingly important role in aggregating information, providing insights, and offering new ways for users to engage with complex topics. While concerns about potential negative impacts remain, the potential benefits of these platforms in terms of data aggregation and decision-making tools are significant.

For Solana users and those interested in the future of decentralized prediction markets, Hedgehog's development will be an interesting project to watch in the coming months and years.

Facts + Figures

• Hedgehog is a prediction market platform built on Solana, aiming to bring features popularized by Polymarket to the Solana ecosystem.
• The project has been in development for several years, pivoting from NFTs to prediction markets as the crypto market evolved.
• Prediction markets were mentioned as a potential use case in the Ethereum whitepaper.
• Platforms like Predictit operated in regulatory gray areas before facing pressure to exclude US users.
• Kalshi is a fully regulated, KYC-compliant prediction market platform in the US, requiring CFTC approval for each market.
• Hedgehog is aiming to create a fully permissionless and on-chain way to create, participate in, and resolve markets.
• The platform is exploring innovative market structures like pooled predictions, pooled parlays, and P2P markets.
• Hedgehog has integrated yield-generating mechanisms into its USDC deposits for pooled markets and parlays.
• The team is leveraging Solana-native tools like Tiplink to improve onboarding for non-crypto users.
• Hedgehog is focusing on mobile optimization rather than native apps due to app store restrictions.
• The platform is planning to launch pooled parlays for the NFL season, with plans to expand to other sports and crypto price predictions.
• Concerns about prediction markets include potential threats to democracy and encouragement of harmful behavior.
• Long-tail markets (e.g., media, content creation) have struggled due to lack of liquidity and expertise.
• Hedgehog is competing with established players like Polymarket by focusing on user experience and innovative market types rather than token incentives.
• The Solana ecosystem provides Hedgehog with advantages in terms of speed, low fees, and an existing user base familiar with the blockchain.

Questions Answered

What are prediction markets and why are they important in crypto?

Prediction markets are platforms where users can bet on the outcomes of various events, from elections to sports games. In the crypto space, they're seen as a compelling use case because they allow for permissionless creation of markets and enable users to put real money behind their predictions. This can lead to more accurate forecasts and provide valuable data on public sentiment and expectations for various events.

How does Hedgehog differ from other prediction market platforms?

Hedgehog differentiates itself by building on Solana, which offers faster transactions and lower fees compared to platforms on other blockchains. The platform is focusing on permissionless market creation and innovative market structures like pooled predictions and pooled parlays. Additionally, Hedgehog integrates yield-generating mechanisms to provide user incentives without relying on token emissions.

What challenges do prediction markets face in terms of regulation?

Prediction markets face significant regulatory challenges, particularly in the United States. Fully regulated platforms like Kalshi must obtain CFTC approval for each market they offer, which can be a cumbersome process. Crypto-native platforms often operate in regulatory gray areas, with many excluding US users to avoid legal issues. Hedgehog is aiming for a fully on-chain, permissionless approach, but this comes with its own set of regulatory considerations.

How is Hedgehog addressing the need for "evergreen" markets?

Recognizing the importance of regular, ongoing markets to sustain user interest, Hedgehog is exploring several approaches. These include creating markets around sports events, crypto price predictions, and other regularly occurring events. The platform is also developing innovative structures like pooled parlays, which allow users to predict multiple outcomes in a single bet, potentially increasing engagement and providing more frequent trading opportunities.

What are the potential negative impacts of prediction markets?

Some critics argue that prediction markets could pose a threat to democracy or encourage harmful behavior. There are concerns that market predictions could influence real-world outcomes or that markets on sensitive topics could incentivize negative actions. However, proponents argue that prediction markets provide valuable data and insights that can aid decision-making and increase transparency in various fields.

How is Hedgehog planning to onboard non-crypto native users?

Hedgehog is exploring several strategies to make their platform more accessible to users new to cryptocurrency. This includes integrating with Solana-native tools like Tiplink, which allows for Google login options. The team is also focusing on optimizing their web interface for mobile use, rather than developing native apps, to avoid app store restrictions. However, challenges remain in simplifying the process of acquiring the necessary tokens for transactions.

What role do prediction markets play in aggregating information and opinions?

Prediction markets serve as a tool for aggregating diverse opinions and information on complex topics. By allowing users to put real money behind their predictions, these markets can provide more accurate forecasts than traditional polling methods. They can offer insights into public sentiment, expert opinions, and potential outcomes for a wide range of events, from elections to product launches to scientific discoveries.

How does building on Solana benefit Hedgehog and its users?

Building on Solana provides Hedgehog with several advantages. Solana's high speed and low transaction fees make it well-suited for the frequent, small-value transactions common in prediction markets. The growing Solana ecosystem also provides a ready-made audience of users familiar with the blockchain's benefits. Additionally, Solana's developer tools and community support enable Hedgehog to integrate with other protocols and services more easily.

What are the challenges in creating markets for long-tail topics?

Long-tail markets, such as those for media or content creation outcomes, face several challenges. These include low liquidity, lack of widespread interest or expertise, and potential for exploitation by a small number of well-informed participants. To address these issues, Hedgehog is exploring alternative market structures, such as no-loss competitions that use yield-generating mechanisms to create interesting betting opportunities without the risk of users losing their principal.

How is Hedgehog planning to compete with established prediction market platforms?

Rather than relying on token incentives or unsustainable yield farming strategies, Hedgehog is focusing on creating a more user-friendly, on-chain experience. The platform is introducing innovative market types, leveraging Solana's speed and low fees, and integrating yield-generating mechanisms to provide organic incentives for users. By offering a unique combination of features and focusing on the growing Solana ecosystem, Hedgehog aims to carve out its own niche in the prediction market space.