American gambling giant DraftKings served as a member of Polygon Labs’ validator community. What the latter company did not disclose, though, is that the operator was not truly an “equal member” of the community.
As outlined in a report by CoinDesk, a crypto news outlet, Polygon had signed a deal that was incredibly lucrative to DraftKings. For reference, DraftKings became one of Polygon Labs’ validators in early 2022, marking the first time a big publicly traded firm has taken a role in blockchain governance.
CoinDesk reviewed dozens of on-chain records related to the company’s validator program to better understand the situation.
The reviewed data showed that Polygon provided DraftKings with millions of dollars of crypto back in 2021. While the news outlet could not confirm whether DraftKings had purchased these tokens, it added that the operator also earned millions through its special validator deal.
CoinDesk added that this deal provides a “rare window” into an arrangement that was not publicly disclosed.
Polygon Treated DraftKings Differently
As mentioned, DraftKings was not an equal member of Polygon’s validator community and was compensated much better than other members. Despite that, DraftKings’ validator eventually shut down.
As one of Polygon’s validators, DraftKings was supposed to lend computing power to its network and verify transactions on the platform. Validators a rewarded by automatically getting sent Polygon’s crypto token, MATIC, in a process known as staking.
Validators can stake MATIC tokens to earn more tokens. In the meantime, MATIC owners who do not have their own validators can delegate their tokens to others for a commission of 5%-10% of the rewards earned from those tokens.
However, DraftKings instead charged a 100% commission, depriving small delegators of MATIC tokens. In addition, the gambling company grew as one of Polygon’s largest validators. Needless to say, this deal was very unusual even within the Web3 sector.
CoinDesk learned that DraftKings’ validator benefitted from MATIC tokens delegated by Polygon and took a 100% commission on a very big tranche. Over the last year, DraftKings’ validator was staking 65.5 million MATIC tokens, 91% of which had been delegated to it by Polygon.
CoinDesk also discovered that DraftKings had staked the initial 2.5 million MATIC tokens it received from Polygon. The operator received these tokens in October 2021 and, soon after that, opened a Polygo-based NFT marketplace and agreed to run a validator. When DraftKings officially became a validator, it announced that it would stake “assets it holds in its treasury,” without specifying that it received those tokens from Polygon.
DraftKings Amassed Huge Rewards Thanks to the Treatment
As mentioned previously, the special treatment of DraftKings was not something Polygon disclosed and it actively contradicted its claim that DraftKings would be an equal member of the validator community.
By the end of the partnership, DraftKings had been delegated 60 million MATIC to help it earn more rewards. Prior to the validator’s fall from grace in October this year, DraftKings withdrew a total of 3.2 million MATIC, worth approximately $2 million and, thanks to Polygon’s special treatment, had amassed more in personal rewards than any other member of the validator community.
Evidently, DraftKings’ gain was another validator’s loss since the network issues only a finite number of MATIC tokens a year.
On November 7, the FTX scandal led to a wave of distrust in the crypto sector. Coincidentally, this date also marked the last time DraftKings staked its new MATIC rewards and opted to withdraw them from that point on.
In September, DraftKings’ validator began to underperform. After three notices, it was shut down for failing to meet its requirements. Polygon then moved its 60 million delegated MATIC tokens to a different validator with zero fees.