Solana-Based Prediction Market Uses DeFi Yields to Finance ‘No Loss’ Betting

Hedgehog’s experimental wagers combine prediction markets with stablecoins, decentralized finance and gamification.

Sep 28, 2021 at 1:00 p.m. UTC
Updated Sep 28, 2021 at 5:08 p.m. UTC

Hedgehog Markets, a fledgling blockchain-based prediction market platform, is testing a novel type of wager where bettors have nothing to lose, at least in theory.

Known as “no-loss markets,” these bets combine prediction markets with several big cryptocurrency trends: decentralized finance (DeFi), stablecoins and “play-to-earn” gaming.

To participate, bettors must put up either $100 or $1,000 worth of USDC, a stablecoin designed to hold its value against the U.S. dollar. In return, bettors receive game tokens, which they can wager in a no-loss market.

Gibraltar-based Hedgehog invests the staked USDC with Port Finance, a decentralized finance (DeFi) lending protocol, where the stablecoins earn interest, like a crypto version of a savings account or certificate of deposit (CD). (Hedgehog and Port both run on the Solana blockchain.)

As in normal prediction markets, participants bet on the outcomes of real-world events, in this case soccer and American football games or cryptocurrency price movements. But whereas in the regular markets those who bet wrong lose money, in the no-loss variant losing bettors recover as much USDC as they put in, when the principal on the DeFi deposit is repaid.

Those who bet correctly, meanwhile, win additional game tokens and are ranked by their return on investment (ROI). The yield earned in the DeFi pool will be paid out as prize money split among those who finish at the top of the competition’s “ROI leaderboard.” Hedgehog is dangling $5,000 to be divided up among the top bettors at the $100 level and $30,000 for distribution to the champions of the $1,000 tier.

Making it ‘fun’

Hedgehog’s gamified approach follows the success of Axie Infinity, a game running on the Ethereum blockchain that amassed nearly half a million daily active users in its first year.

Gamification “attracts a larger audience than just large-scale traders,” Hedgehog founder George Yu, a former Google software engineer, told CoinDesk. One thing Hedgehog considered was “how do you make it fun for people who aren’t necessarily degens” – DeFi slang for high rollers.

If the yield from the DeFi pools falls short of the prize amounts, Hedgehog will make up the difference, said Ariana Fariab, who handles growth for Hedgehog. “If the yield ends up being more, [then that’s] great, the prize pools will be larger – all yield goes back to users in the form of prize pools.”

To be clear: The principal protection on bettors’ deposits will rely on the security of the smart contracts, or the software running on the blockchain.

“Depending on the bug or exploit, it is possible for a nefarious actor to take some or all of the funds stored in Hedgehog’s smart contracts,” notes a disclaimer on Hedgehog’s website.

To mitigate this risk, Hedgehog has hired auditing firm Quantstamp to review the code. However, unlike a traditional bank account, the staked USDC will have nothing like FDIC insurance backing it.

“We are not liable for any theft or loss of your cryptographic tokens or property resulting from your use of the services or participation in any markets,” warns Hedgehog’s terms of service.

Betting on beliefs

Prediction markets are designed to incentivize people with expertise on a topic to tell the world what they really think is going to happen by betting on consequential things like elections or tropical storms or COVID-19 case counts.

Since bettors have money on the line, they will bet on what they truly believe, and if there is money to be made, bona fide experts will have a strong motivation to participate, the thinking goes.

So far, however, this has remained a niche market, due partly to regulatory constraints.

PredictIt, probably the most popular prediction market, is allowed to operate by a no-action letter from the U.S. Commodity Futures Trading Commission (CFTC) on the rationale that it is run for academic research purposes, and it lets traders bet up to only $850 on any one market. Kalshi, another centralized prediction market, has a full-fledged CFTC license and must notify the agency any time it creates a new market.

Hedgehog, whose official legal name is Futarchy Research Limited, raised $3.5 million in July from investors, including the Solana Foundation and crypto billionaire Sam Bankman-Fried’s Alameda Research.

It is one of several crypto-based prediction markets that have sprouted up with the goal of replacing centralized intermediaries with smart contracts. Others include Polymarket, Augur and Gnosis.

Hedgehog Markets is not to be confused with Hedgehog Technologies, a startup that lets traders sync various crypto wallets and exchange accounts to get a bird’s-eye view of their portfolios, and recently raised its own seed round.

DISCLOSURE

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Marc Hochstein is CoinDesk's executive editor. He owns some bitcoin.