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Polygon’s Secret Deal with DraftKings: Millions For a Failed Validator

Polygon's Secret Deal with DraftKings- Millions For a Failed Validator
Polygon’s Secret Deal with DraftKings- Millions For a Failed Validator

In early 2022, DraftKings became a network validator for Polygon blockchain, marking a significant milestone for the sports-betting company as the first major publicly-traded firm to take an active role in blockchain governance. However, what was not disclosed at the time was that Polygon was paying DraftKings millions of valuable MATIC tokens to do so.

According to on-chain data, DraftKings received millions of dollars in crypto directly from Polygon at the start of their “strategic blockchain agreement” in October 2021, and earned millions more through a special staking relationship. Despite being paid, DraftKings failed to maintain its validator’s performance and was kicked off the network last month. This article will explore the previously unreported financial setup between Polygon and DraftKings, shedding light on the special treatment given to the sports-betting company and the consequences that followed.

DraftKings’ Polygon Validator

DraftKings, a popular sports betting and gaming company, was one of the validators on Polygon’s network. As a validator, DraftKings was responsible for verifying transactions on the platform and was rewarded with Polygon’s crypto, called MATIC. Validators stake MATIC as collateral against their doing honest work, and they can earn more MATIC rewards by staking more MATIC tokens.

However, DraftKings’ validator stood out from the rest. Unlike most Polygon validators that charge a 5%-10% commission on the rewards earned from delegated tokens, DraftKings charged a 100% commission. This meant that its dozen or so small-time delegators didn’t receive a single MATIC token as a reward.

One of DraftKings’ delegators, Boris Mann, estimated he missed around $800 because he didn’t realize the company took the whole staking reward as commission. Despite this, DraftKings’ validator grew to be among the Polygon network’s largest, with Polygon delegating 60 million MATIC tokens to help DraftKings earn more staking rewards.

It’s unclear why Polygon allowed DraftKings to charge such a high commission, but it seems that was kind of the point. The company’s validator was set up to be a “set and forget” system, which may have appealed to some delegators looking for a hands-off approach to staking their MATIC tokens.

Overall, DraftKings’ validator on Polygon’s network was an anomaly, charging a much higher commission than most validators. While it’s unclear why Polygon allowed this, it’s clear that some delegators were not happy with the arrangement.

No Money Down for DraftKings

Delegating tokens to validators is a common practice among blockchain stewards, as it allows them to reward brand partners and network contributors without affecting their balance sheets. This is achieved by using delegated tokens, which can be retrieved by the foundation at any time.

According to Edouard Lavidalle, co-founder of Stakin, a crypto staking company that runs a validator on Polygon, foundations typically have substantial treasuries of their blockchain’s native tokens. These tokens need to be staked and diversified while ensuring performance and decentralization.

However, the extent of the stake that Polygon delegated to DraftKings, combined with the agreement for DraftKings to receive 100% of rewards, is highly unusual. On November 14, a single Polygon Foundation-controlled wallet held nearly 13% of all MATIC being staked to the network, with 454 million tokens spread across 26 validators. More than half of these tokens were with validators charging no commission, meaning Polygon received all the rewards. Most of the remaining tokens were with validators taking up to 10%, with only one validator (Stake Capital) charging 100%. Its delegated stake was a fraction of the size of DraftKings’.

DraftKings’ validator had been staking 65.5 million MATIC tokens for most of the last year, with 91% of them delegated by Polygon. DraftKings had staked the remaining tokens from its own treasury, earning 3 million MATIC from staking rewards and staking 2.5 million MATIC at the beginning of the relationship in March 2022.

Blockchain data shows that Polygon Foundation sent DraftKings this MATIC in early October 2021, worth $3.2 million at the time. Within weeks, the two companies announced that DraftKings would host a Polygon-based NFT marketplace and opened the door to running a validator.

When DraftKings eventually ran a validator five months later, it did not disclose that it had received tokens from Polygon Foundation. Instead, it informed its investors that it would stake digital assets from its treasury to earn rewards on the Polygon network.

An uncommon Relationship

Polygon’s decision to delegate millions of tokens to DraftKings, an online sports betting company, raised concerns about the blockchain company’s commitment to decentralization. Despite Polygon’s co-founder, Sandeep Nailwal, characterizing DraftKings as an “equal community member,” the undisclosed allocation to the validator and its near-complete reliance on Polygon contradicted this statement.

Between November 2022 and mid-October 2023, DraftKings withdrew 3.2 million MATIC, worth over $2 million at current prices. This was made possible by Polygon’s massive delegation of 60 million MATIC tokens to DraftKings, which allowed the validator to earn more in personal rewards than any other validator over that period. However, these rewards came at the expense of every other staker in Polygon’s ecosystem.

The issue was compounded by the fact that at least 80% of DraftKings’ Polygon-delegated tokens came directly from the foundation, diluting how much rewards everyone else could get. This undercut the principle of decentralization and raised questions about the fairness of the network’s reward system.

Despite these concerns, it should be noted that the relationship between Polygon and DraftKings was not unique. Many blockchain companies delegate tokens to validators, and some validators earn more rewards than others. However, the scale of the delegation to DraftKings and the impact it had on the network’s reward system made it a significant issue for Polygon.

Trending Towards Irrelevance

DraftKings, a company that provides online sports betting and gaming services, had been a major player in the Polygon validator program until recently. However, the company’s validator began underperforming in its core job of checking the chain, leading to its eventual removal from the program in October 2023.

DraftKings had been rolling in MATIC rewards, with its token stake growing 120% to 5,578,691 MATIC ($6.3 million at the time) over eight months. This was the highest amount earned by any Polygon validator over that time period. However, DraftKings had been charging 100% commission on many of the tokens delegated from Polygon, which raised questions about the company’s motives.

The validator kept on going for nearly a year until September 2023 when it began underperforming. Polygon gave the company a “final notice” before booting it from the program. Despite this setback, DraftKings’ separate NFT deal with Polygon remains active.

The company has stated that it is working with a third-party provider to have its validator node reinstated on the Polygon network, adhering to standard procedures that all Polygon validators must follow. However, it remains to be seen whether DraftKings will be able to regain its former position in the program.

The situation with DraftKings highlights the importance of maintaining infrastructure in the rapidly evolving world of cryptocurrency. Companies that fail to do so risk falling behind and becoming irrelevant. As the crypto industry continues to grow and evolve, it is essential for companies to stay on top of their game in order to remain competitive.

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