Founders and CEOs come and go in crypto’s upper echelons. But is Brian Armstrong forever?

It’s a question worth asking after the 40-year-old head of Coinbase has been on the job for more than a decade. In that time, he’s outlasted most of his business partners as well as the competition to create the most important exchange serving U.S. crypto traders.

This profile is part of CoinDesk’s Most Influential 2023. For the full list, click here.

Now, Coinbase is finding potentially lucrative ways to enter new product markets, including the derivatives trading game. In mere weeks, it might begin custodying BTC for one of the many bitcoin (BTC) exchange traded funds (ETFs) waiting for regulatory approval. After all, Coinbase is the partner of choice for most of the issuers.

As for Armstrong’s biggest business foes, well, they’ve been vanquished by his home country.

Before FTX imploded under the weight of its CEO’s massive fraud scheme, Sam Bankman-Fried was planning to rewrite the rules of U.S. futures trading – an arena Coinbase entered just last month. Of course, it didn’t end up quite how he envisioned it. SBF started FTX in 2019 and resigned in 2022.

And Changpeng “CZ” Zhao no longer poses a threat to Armstrong’s top-dog stature. In November, Binance’s king of crypto stepped down as part of a deal to atone for the wily exchange’s past compliance sins. Binance remains the world’s largest exchange, and therefore a competitor to Coinbase’s global ambitions. But it will go forth without the input of the founder who put it there (Richard Teng, a relative unknown, is the new CEO). CZ started Binance in 2017 and stepped down this year as his company faced multiple investigations from U.S. authorities.

Armstrong, who started Coinbase in 2012, shows no signs of slowing down. Reached by email, he detailed several major accomplishments this year, starting with the launch of Base, Coinbase’s popular Layer 2 (CoinDesk’s “Most Influential 2023” also honors Jesse Pollak, Base’s lead architect).

Coinbase also moved aggressively into crypto derivatives this year, with the launch of a new international exchange, and the facilitation of U.S. derivatives trading through its Coinbase Financial Markets service. “Derivatives make up 75% of global crypto volumes and the industry is in need of a trusted, regulatory compliant exchange like Coinbase to offer safe derivatives products,” Armstrong told CoinDesk.

To be sure, Coinbase faces major headwinds, particularly on the regulation front.

This June, the U.S. Securities and Exchange Commission launched a major lawsuit against Coinbase, accusing it of operating an illegal securities exchange, broker and clearing agency.

The case is a key one for the whole crypto industry, which, by inference, faces the same accusations of massive securities violations. Coinbase finds itself as a standard bearer for the whole industry in its fight against Gary Gensler’s SEC, which seeks to treat all tokens, bar bitcoin, as securities and therefore subject to the SEC’s remit.

Against Gensler’s depiction of Coinbase as profiting off crypto’s wild west is Armstrong’s vision of the company as something closer to a local sheriff. After all, Coinbase is one of the world’s most tightly regulated crypto exchange companies by virtue of its listing on public markets, which happened in 2021. That moment capped years of compliance concessions that Armstrong says slowed its growth but was well worth it.

“It’s more difficult and expensive to take a compliant approach. You can’t launch every product that customers want when it’s illegal. But it’s the right approach because we believe in rule of law,” he tweeted on Nov 21, after CZ pleaded guilty.

Now that crypto’s “new chapter” has arrived, Armstrong is well poised to lead its public-facing front even more than he already has.

The bald-headed CEO has never been one to shy away from controversy. In late 2020, he declared Coinbase would be a “mission-driven company” that would not engage with its employees on social activism fronts, as many other Silicon Valley startups were doing at the time. Instead, he wanted employees to focus solely on Coinbase’s commitment to crypto. This would be the single political area where Armstrong said Coinbase would engage.

In 2023, Coinbase and Armstrong pushed back in the perceived “war against crypto” with vocal calls to action against the U.S. agencies leading it. Whether it’s compelling customers to flood troublesome IRS rules proposals with comments, or criticizing the SEC for regulating by enforcement, Armstrong is seeing his statement through.

The most important entrant to Armstrong’s battle may be its non-profit, Stand With Crypto. Launched in mid-2023, the pro-crypto policy group’s stated mission is to defend the entire industry from critics in America’s halls of power.

The group is modeling its efforts around what’s worked for the U.S.’s most influential advocacy outfits. Planned Parenthood and the National Rifle Association both grade politicians based on their commitment to niche political issues – a tactic that helps voters divvy up their donations as well as their votes. Stand With Crypto is doing the same.

“There’s 52 million Americans who use crypto now,” Armstrong said in a CNBC interview in late September, right after he chaired a Stand With Crypto event in DC. By his actions – if not his words – he was doing what he could to be the voice for this “major constituency.”

“Coinbase was proud to help launch an independent movement known as Stand with Crypto that now has more than 100,000 advocates and unique tools that help connect advocates directly with their representatives to make their voices heard,” Armstrong told CoinDesk via email.

It is worth remembering that Stand With Crypto serves Coinbase’s business interests. This is a publicly traded company that seeks to grow by onboarding more people into its services, generating more revenue, boosting its share price for its investors. Regulatory clarity and Capitol Hill muscle could clear the field and get it done.

Regardless, it’s not engaged (at least not yet) in the narrow kind of rulemaking lobbying that will predominantly serve ITS business interests, as FTX tried to do with commodities rulemaking. The fight that Coinbase and Armstrong are leading would likely pay dividends for the entire industry. It just so happens that Coinbase’s number-one position means it stands to benefit the most.

Armstrong’s efforts to crowdsource Coinbase’s political influence points to the company’s subtly shifting strategies. Undoubtedly it’s one of the biggest crypto lobbyists in D.C., having spent $2.1 million through the first three quarters of the year.

“Now that some enforcement actions have landed, we have an opportunity as an industry to turn the page and write the next chapter of crypto adoption. I’m proud that Coinbase has always taken a compliant and trusted approach, and built for the long term, playing by the rules,” Armstrong writes. “What keeps me motivated is that I’m passionate about economic freedom, and I can see that the technology underlying crypto is powerful enough that it will help bring this to the world. Crypto isn’t going anyway, it’s the future of money, and will become a greater share of global GDP over time,” he said.

“With Layer 2, ETFs, and the Bitcoin halving next year, I’m optimistic for 2024.”

• Sports-betting company DraftKings publicly agreed in early 2022 to be a network validator that helped run the Polygon blockchain.

• On-chain data shows Polygon gave DraftKings millions of MATIC to help its validator turn a massive profit with little precedent.

• Even though it was being paid, DraftKings failed to maintain its validator’s performance and was kicked off the network last month.

In early 2022, Polygon Labs announced an “important adoption milestone” for its tech infrastructure: DraftKings would begin running one of its network validators, “marking the first time a major publicly-traded firm has taken an active role in blockchain governance.”

What Polygon neglected to disclose at the time: It was paying the sports-betting company millions of valuable MATIC tokens to do it.

Twenty months later, Polygon has sunk those millions into a validator that’s gone kaput.

CoinDesk reviewed dozens of on-chain records relating to Polygon’s validator program to make sense of the companies’ previously unreported financial setup, and interviewed former employees and validator operators familiar with Polygon’s staking ecosystem.

On-chain data reveals that DraftKings received millions of dollars in crypto directly from Polygon at the start of their “strategic blockchain agreement” in October 2021. DraftKings then earned millions more through a special staking relationship that few of Polygon network’s other validators enjoyed. Neither company disclosed these financial ties.

It’s not unheard of for Web3 companies to pay mainstream brands to take part in their crypto ecosystems, be it through marketing partnerships or tech setups. But they balk at publicly discussing the treasure they spend to build this image of mainstream adoption. The on-chain data showing Polygon’s special treatment of DraftKings provides a rare window into such an arrangement.

Representatives for Polygon and DraftKings declined to discuss the financing of the validator deal, citing confidentiality agreements.

DraftKings was not an “equal community member” among Polygon network’s 100 validators, as one Polygon executive called it. Blockchain data show it received outsized compensation to take an “active role in blockchain governance” – and then didn’t hold up its end of the bargain.

Being a validator on Polygon’s network comes with responsibilities. By design, only 100-odd entities – corporations, staking services, crypto exchanges and others – may lend their computing power to the network at once. They do the work of verifying transactions on the platform. The network rewards their efforts by automatically sending them Polygon’s crypto, called MATIC. This is the key to the process known as staking.

Validators “stake” MATIC as collateral against their doing honest work. They can earn more MATIC rewards by staking more MATIC tokens. MATIC owners who don’t run their own validators can “delegate” their tokens to others, who do. Most Polygon validators charge a 5%-10% commission on the rewards earned from these delegated tokens.

DraftKings’ validator was different. It charged a 100% commission, meaning its dozen or so small-time delegators didn’t get a single MATIC token as reward.

“The whole point was to set and forget it,” said Boris Mann, one such DraftKings delegator, who estimated he missed around $800 because he didn’t realize the company took the whole staking reward as commission.

The DraftKings validator grew to be among the Polygon network’s largest. Its biggest delegator was Polygon: The project had delegated 60 million MATIC tokens to help DraftKings earn more staking rewards.

Polygon apparently wasn’t concerned with letting DraftKings eat its lunch – it seems that was kind of the point.

There’s nothing unusual about Polygon Foundation – or any blockchain steward, really – delegating its native token to other validators, people familiar with the staking industry said.

By delegating tokens to validators, foundations can pay brand partners and reward network contributors without taking a direct hit to the balance sheet. The partners benefit from the staking payouts accrued to them by using delegated tokens; at the end of the day, the foundation can get those tokens back.

“Foundations naturally have huge treasuries” of their blockchains’ native tokens, said Edouard Lavidalle, the co-founder of Stakin, a crypto staking company that runs a validator on Polygon. “They need to stake these, and diversify this stake, while caring about performance and decentralization.”

But the size of the stake Polygon delegated to DraftKings, combined with the arrangement for DraftKings to take 100% of rewards, is highly unusual.

On Nov. 14 (a month after DraftKings’ validator was removed from the network), a single Polygon Foundation-controlled wallet wielded nearly 13% of all MATIC being staked to the network. This wallet had spread 454 million tokens across 26 validators. Just over 50% of these tokens were with validators charging no commission – meaning Polygon got all the rewards. Most of the rest was with validators taking up to 10%. Just one validator (Stake Capital) with Polygon’s MATIC charged 100%, and its delegated stake was a fraction the size of what DraftKings’ was.

This chart shows how DraftKings’ validator benefitted from MATIC tokens delegated by Polygon. It took a 100% commission on an unusually large tranche. (Chart by C. Spencer Beggs/CoinDesk)

For most of the last year, DraftKings’ validator was staking 65.5 million MATIC tokens, 91% of which had been delegated to it by Polygon. Most of the rest was DraftKings’ own MATIC: 3 million MATIC it earned from staking rewards, and 2.5 million it had staked at the beginning of the relationship in March 2022.

Blockchain data indicates DraftKings received this MATIC from Polygon Foundation in early October 2021. At the time, it was worth $3.2 million. Within weeks, the duo announced DraftKings would host a Polygon-based NFT marketplace. DraftKings also opened the door to running a validator.

When it did so five months later, DraftKings told its investors it would “stake digital assets it holds in its treasury” to earn rewards on the Polygon network. It did not say it had received those tokens from Polygon, nor did Polygon say it had sent any.

Polygon’s undisclosed allocation to DraftKings – and its validator’s near-complete reliance on Polygon – undercut the blockchain company’s own characterizations about the validator being like all the others.

“DraftKings will take its place among existing validators as an equal community member, solidifying our desire to achieve a decentralized, community-run consensus network,” Sandeep Nailwal, co-founder of Polygon, said in a press release on March 7, 2022.

The statement made no mention of Polygon’s strategy to delegate millions of tokens to DraftKings. At that time, it had already earmarked 10 million MATIC for the validator; by the end of the relationship, that total had grown to 60 million MATIC.

From November 2022 until the validator’s demise in mid-October 2023, DraftKings withdrew a total of 3.2 million MATIC, worth just over $2 million at current prices. It had amassed more in personal rewards than any other validator over that period. These rewards were possible only because of Polygon’s massive delegation. Without those 60 million MATIC tokens, DraftKings might have earned only 4% of what it did, data from validator.info suggests.

DraftKings’ earnings came at the expense of every other staker in Polygon’s ecosystem. The network issues only a finite number of MATIC rewards to stakers annually. At least 80% of DraftKings’ Polygon-delegated tokens came directly from the foundation, meaning they were not previously being staked. These newly delegated tokens diluted how much rewards everyone else could get.

It is unclear why DraftKings allowed its Polygon validator to fall into disrepair. But on-chain clues hint the companies’ infrastructure relationship began to shift just over a year ago.

On Nov. 7, 2022, the entire crypto industry was on the cusp of chaos. Rumors were swirling of a massive financial hole at crypto exchange FTX. Within days, it would declare bankruptcy and its founder Sam Bankman-Fried would be arrested and later convicted of fraud.

By this point, DraftKings was rolling in MATIC rewards. In eight months, the validator’s token stake had grown 120% to 5,578,691 MATIC ($6.3 million at the time). No other Polygon validator had earned that much for itself over that time. Then again, none of the other validators had been charging 100% commission on so many tokens delegated from Polygon.

DraftKings had been methodically staking its new MATIC rewards almost every day in order to compound the returns, according to data site validator.info. It did so one final time on Nov. 7, 2022. From then on, DraftKings has only opted to withdraw rewards.

DraftKings’ validator kept on going for nearly a year until this September, when it began underperforming in its core job of checking the chain. It received a first strike, then a second; in early October, it got a “final notice.” The self-policing network would soon boot DraftKings for failing to meet its requirements.

Polygon’s separate NFT deal with DraftKings remains active.

On Oct. 19, Polygon kicked DraftKings out of the validator program and reassigned its slot to the crypto exchange Upbit. On Nov. 9, it moved its 60 million delegated MATIC tokens from DraftKings’ defunct validator to a different one, with zero fees.

“We are working with a third-party provider to have our validator node reinstated on the Polygon network adhering to standard procedures that all Polygon validators must follow. This will not impact our customers,” a DraftKings employee close to the deal said.