Delivering millions of dollars just for one validator, how hard can Web3 fight to gain mainstream recognition?

Original title: Polygon’s Secret Deal: Sending DraftKings Millions to Run Failed Validator

By Danny Nelson, CoinDesk

Translated by Carl, Techub News

• In early 2022, sportsbook DraftKings publicly agreed to become a network validator for Polygon.
• On-chain data shows that Polygon has provided millions of dollars worth of MATIC to DraftKings, allowing DraftKings to make huge profits by operating Polygon validators, which has no precedent in the past.
• Despite receiving the subsidy, DraftKings failed to maintain the performance of the validator and was kicked out of the network last month.

In early 2022, Polygon Labs announced a “significant milestone” in its infrastructure: sportsbook DraftKings will start running Polygon’s network validator. According to Polygon, this "marks the first time that a large public company has played an active role in blockchain governance. 」

Polygon didn’t disclose at the time that it had offered a huge subsidy to get DraftKings to agree to operate the validator. Twenty months later, Polygon gave up the multimillion-dollar validator that had expired.

CoinDesk reviewed dozens of on-chain records related to the Polygon validator program to understand the companies’ previously unreported financials, and interviewed former employees and validator operators who are familiar with the Polygon staking ecosystem.

On-chain data shows that at the beginning of the “blockchain strategic agreement” signed by the two parties in October 2021, DraftKings received millions of dollars in MATIC directly from Polygon (it is unclear whether DraftKings paid the fee). DraftKings has since earned millions of dollars through a special staking mechanism, which is an advantage that other validators can’t get. However, at that time, neither company disclosed these financial figures.

Web3 companies pay a fee for traditional businesses to adopt Web3 products in marketing partnerships or technical support with traditional companies in order to facilitate their participation in the cryptocurrency ecosystem. While this is not news, many Web3 companies are reluctant to openly discuss the money they spend on it. On-chain data provides a rare way to understand these things.

A Polygon executive said that DraftKings is not an “ordinary community member” among the 100 validators of the Polygon network, and that it is being paid hefty amounts to “play an active role in blockchain governance” but does not deliver on its promises.

Polygon Validator for DraftKings

As Polygon is designed, only more than 100 entities (companies, stakers, cryptocurrency exchanges, etc.) can lend their computing power to the network at the same time to verify transactions on the network. The network automatically sends them MATIC to reward them for their efforts. Validators use MATIC as collateral for their honest work and can earn more MATIC rewards by staking more MATIC. MATIC owners who don’t run validators can “delegate” their tokens to others running validators. Most Polygon validators charge a 5%-10% commission on the rewards earned for these delegated tokens.

The validator run by DraftKings charges a 100% commission rate, which means that its delegators do not receive any MATIC rewards. According to Boris Mann, one of DraftKings’ clients, "The point is to forget about it when you’re done. He estimated that he had lost about $800 because he didn’t realize that DraftKings was using the entire staking reward as a commission.

The DraftKings validator has become one of the largest validators on the Polygon network, with its largest delegator being Polygon, with a total of 60 million MATIC delegated to help DraftKings earn more staking rewards. The point is that Polygon doesn’t seem to care that DraftKings takes all of the staking rewards.

DraftKings Almost Zero Cost “Wool Picking”

According to people familiar with the staking industry, there’s nothing out of the ordinary for the Polygon Foundation (or any blockchain manager) to delegate its native token to another validator. By delegating tokens to validators, the Foundation can use staking rewards to pay brand partners and reward network contributors without directly impacting the balance sheet. Partners can earn staking rewards by delegating tokens to validators. Eventually, the Foundation can take back these tokens.

Edouard Lavidalle, co-founder of cryptocurrency firm Stakin, said, "The Foundation has a vast library of blockchain-native tokens. They need to stake these and diversify their staking while caring about performance and decentralization. ”

But Polygon’s order size for DraftKings, as well as DraftKings’ 100% commission percentage, is very unusual.

On November 14, a month after DraftKings’ validator was removed from the network, a Polygon Foundation-controlled wallet staked nearly 13% of all MATIC staked on the network, and the wallet has delegated 454 million tokens across 26 validators. Of these, more than 50% of the tokens are validator-free, which means that Polygon receives all the rewards. Most of the remaining validators receive a 10% commission. Only one validator (Stake Capital) charges 100% of the fees, but the size of its delegation is still small compared to DraftKings.

This chart shows how DraftKings’ validators profit from Polygon’s delegated MATIC, which charges a very large commission. (Chart courtesy of C. Spencer Beggs/CoinDesk)

For most of last year, DraftKings’ validators staked 65.5 million MATIC tokens, 91% of which were delegated by the Polygon Foundation, with most of the rest being DraftKings’ own, including 3 million MATIC earned through staking rewards, and 2.5 million MATIC staked at the start of the partnership in March 2022.

On-chain data shows that DraftKings received 2.5 million MATIC from the Polygon Foundation in early October 2021, which was worth about $3.2 million at the time. Within weeks, DraftKings announced that it would launch a Polygon-based NFT marketplace, and at the same time, DraftKings would become a network validator for Polygon.

Five months later, DraftKings told investors that it would “stake digital assets held in its vaults” to earn rewards on Polygon, but did not mention that it had already received those tokens from Polygon or sent any tokens.

Special Relationship between Polygon and DraftKings

The special relationship between the two shows that Polygon does not treat all validators equally. In a March 7, 2022 press release, Polygon co-founder Sandeep Nailwal said, “DraftKings will be running validators as regular community members, cementing our desire to achieve a decentralized, community-run consensus network.” ”

The statement did not mention that Polygon was entrusting millions of tokens to DraftKings. At the time, it had set aside 10 million MATIC for DraftKings, and by the end of the partnership, that number had grown to 60 million.

From November 2022 to mid-October 2023, DraftKings received a total of 3.2 million MATIC, worth just over $2 million at current prices. This means that DraftKings has accumulated more rewards than any other validator, and that’s precisely because it has a special license from Polygon.

According to Validator.info, without these 60 million MATIC tokens, DraftKings’ revenue could have been as low as 4% of its actual revenue.

DraftKings’ revenue comes at the expense of other stakeholders in the Polygon ecosystem, and the network only issues a limited number of MATIC rewards to stakers each year, while at least 80% of the MATIC staked by DraftKings comes directly from the Polygon Foundation, which dilutes the rewards that others may receive.

Relationship Shifts

It’s unclear why DraftKings left the Polygon validator it operates in an inoperable state, but on-chain clues suggest that the two companies’ infrastructure partnership began to shift more than a year ago.

On November 7, 2022, the crypto industry was on the cusp of chaos, with rumors of FTX’s huge financial vulnerabilities rife. Within days, the company declared bankruptcy, and later its founder, SBF, was arrested and convicted of fraud.

At the time, DraftKings was making a lot of money with MATIC rewards. In eight months, its revenue grew by 120% to 5,578,691 MATIC. In that time, no other validator has made that much money, and then again, no validator has been able to take 100% of the commission from so many tokens delegated by Polygon.

According to Validator.info, DraftKings is methodically staking new MATIC rewards almost every day to achieve compounding returns. The last time the stake was increased was on November 7, 2022, and since then, DraftKings has started to redeem only rewards.

DraftKings’ validator has been running continuously for almost a year, and in September of this year, the validator started having problems with the core validation work and received two warnings in a row. In early October, it received a “final warning” that the overseeing network would soon shut it down for DraftKings’ failure to meet its demands, but the collaboration between the two parties on NFTs is still ongoing.

On October 19, Polygon kicked DraftKings out of the validator program and handed the spot to crypto exchange Upbit. On November 9, it transferred 60 million delegated MATIC from a DraftKings expired validator to another validator.

“We are working with third-party vendors to restore our validator nodes on the Polygon network following standard procedures that all Polygon validators must follow,” said a DraftKings employee who understands the scope of the partnership. This has no impact on our customers. ”