A Close Look at Polygon’s Deal With Draftkings

Blockchain data shows that Polygon quietly gave Draft Kings preferential treatment while telling the public that it was an equal member of the validator community. Joining us now to discuss this coin desks, managing editor for data and tokens. Danny Nelson. Danny, welcome to the show. Good to be here. It's like a blast from the past, isn't it? This is not the hash, it is first mover and Danny Nelson is here talking about his stories. All right, Danny. So uh Draft Kings Sports Betting Company joined Polygon as a network validator in 2022. You uncovered quite a bit while writing this story, talk to us about what you found. Yes. So uh I've been following this story since February when I noticed something weird about the validator. Uh What about Draftkings validator on the Polygon network? Now, Polygon only has about 100 validators and those validators can make money by staking tokens in the proof of stake network and they also can have tokens delegated to them and earn a commission that they uh from those delegated tokens. Now, it's all very complicated. It, it really takes a while to understand. You should really read the article, if you're not familiar with the sting industry, but the TLDR of it is that the Draft Kings validator was different than almost every other validator because it took 100% commission on delegated stake. And what that means is that people who would effectively loan draft the draft Kings validator uh tokens so that they could make money instead of those people getting the money, draft Kings was getting the money. And where this took an interesting turn was that the Polygon Foundation was delegating 60 million Matic tokens, which was more than almost to any other validator to draft Kings. And that was helping draft Kings make a whole lot more money than really any other validator in the ecosystem. And so when we talk about preferential treatment, you know, there's quite a lot of different ways you can take that. But f from the financial perspective, this draft Kings validator was getting a lot more of a financial edge than the other validators in the Polygon network. Do, do we know how much in dollar terms this this came out to, you know, it's, it's hard to say because we, we, when you talk in dollar terms, I think it's most useful if you're talking about. Well, what is the moment that they cashed out the tokens to make it into dollars? So they, they realize the profit and it's, it's not really clear to me that there was any profit realized here and So when you don't have that moment, you have to think about. Well, do I, do I measure the value right now? Do I measure the value back in time when X or Y happened? Uh regardless? I think it's safe to say that, but that, that the draft Kings validator has accrued a couple million dollars worth of uh profit valued at Matic tokens uh through the course of this deal. And, and, and do we know if there are any regulatory issue? Draft Kings is a publicly traded company. Uh Does it have any regulatory issues? I mean, they're, they're obviously in the gambling business. It's not like, oh, you know, they're, they're doing risky things, how dare they. Uh But nonetheless, it's still a, it's a publicly traded company. It has regulations up the wazoo regarding how it reports. Things. Do we know if it's reported any of this as income or, or uh potential income anywhere in their, in their financial statements? Yes. So I didn't include this in the story because it's hard to say for certain what a line item on a balance sheet is relative to something on the Blockchain because there are two different sets of records. But in Draft Kings uh financial statements since around the time that this relationship began, draft Kings has been reporting that they have held millions of dollars worth of unnamed digital assets. So it's not, it's not possible to say that they were disclosing the that, that the, the disclosed Cryptocurrency was manic tokens. But as far as I can tell there, there's no legal or regulatory issues at play here. It's simply just talking to the public about what's happening on Shane. Now, you, you said at the very beginning, you said you were, you've been monitoring uh Matic II, I kind of want to get into the, the, the weeds of how you came up with this idea to, to look at Matic and to look at uh Draftkings in particular. What was the impetus for this? Like, how did you go? Wait a minute. This is Draft Kings. What's going on here? Well, back in February I noticed something strange about, well, I see, I was surfing the web. I was on one of the many different websites that people can use to track statistics about validator networks. I don't remember what had prompted me to, but I saw the name Draftkings. I was like, oh, I remember that Draft Kings had launched this Polygon validator. And then I saw, well, that's weird. It's taking 100% commission, which I know a little bit about the staking industry. And it doesn't really make sense to me. It didn't make sense to me why anyone would stake, would, would delegate their stake to a validator that was taking all the money because it means that the people who are delegating were getting none of the money. And then I started to dig deeper into this to understand why the draft Kings validator was one of the biggest of the network where the money was coming from. Uh And also how it stacked up against all the other uh uh validators on the work that we're receiving. Well, that were being delegated ma to its from Polygon. And what I found was uh earlier this month, there were about 26 25 26 validators that were receiving stake that were, that. There's so many words here, it's hard to get them. All right. That were, that were being delegated Matic stake by the foundation. Uh And for the most part, all of them were charging around 10% commission uh except for two of them. Uh and one of them was the Draft Kings validator, which is in this chart on the far right. Uh You can see that the teal color that is all uh those are all tokens delegated by the foundation and Draftkings is collecting 100% of the uh of the uh income generated from that process. And Danny really quickly before we go, I know the article says that Draft Kings was kicked out of the validator program in October, any indication as to why. Yeah. So the the most we don't know what went wrong. Other than that, it seems to have fizzled out like the the validators in order to stay in the network they need to maintain about just about 95% uptime. Uh, and the drafting validator was maintaining 94% of the time, which isn't that far off the mark. But because this is an automated system, uh, if you're falling below the mark, you get cut. And that, that's what happened. I reached out to drafting, they declined to tell me what happened to their validator, which I think is run by a third party called it Zero. Hash. But they said they are working with their third party provider to try to get it reinstated to the network. All right. And any response from Polygon on this, uh, Polygon declined to comment on, on the situation.