Deutsche Telekom’s foray into crypto raises more questions than it answers

Last week, Deutsche Telekom started running a validator node for Polygon, a top-ten blockchain by the amount of investor deposits in its DeFi ecosystem. Polygon supporters praised the blockchain’s high-rolling partnership.

Validators nodes, like the ones Deutsche Telekom runs, help confirm transactions sent through blockchains. Those who run them must put up some crypto as collateral to do so, or have others delegate assets to them. In return, those who put up their assets automatically receive rewards from the network.

In this sense, running validators helps keep blockchains secure.

But why is Deutsche Telekom, a technology giant associated with a bygone era, diving into the role of a Polygon validator?

Deutsche Telekom has a goal to become an infrastructure provider in web3, Dirk Röder, head of the Blockchain Solutions Center at Deutsche Telekom, told DL News.

“Supporting the Polygon network as a validator is a big milestone in this objective,” he said.

Supporting Ethereum by validating for Polygon?

But Deutsche Telekom has an even more specific interest in web3.

The company has “a focus on the Ethereum ecosystem and its scalability solutions,” and Deutsche Telekom’s foray into Polygon is in line with that, Röder said.

The company describes Polygon as “the leading Ethereum Layer-2 scaling platform” which implies that Polygon relies on Ethereum for its blockchain security like Arbitrum and Optimism. It also says the company “relies on Polygon to strengthen the Ethereum ecosystem.”

“Polygon validators sign checkpoints on the Ethereum blockchain, security is derived directly from Ethereum Layer 1 consensus, which is secured by more than 20 million ETH staked,” Röder told DL News.

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But Deutsche Telekom’s specific interest in Polygon may not accurately represent the nature of the blockchain — a concern that once led Polygon to change its marketing.

Polygon initially promoted its technology as a layer 2 scaling solution for Ethereum. However, in response to criticism from many in crypto about potential misrepresentation, the company decided to discontinue the use of such terminology.

Polygon is a sidechain, which operates like an independent blockchain with no security relation with Ethereum. More specifically, some have called Polygon a “commit-chain” based on the fact that it “commits” its transaction history to Ethereum but does not rely on it to ensure transaction records are accurate.

Röder did not immediately reply to a question about Polygon not relying on Ethereum for its security.

Polygon’s assets are secured by a multi-signature wallet controlled by a group of eight individuals or entities. Signature from five of them is enough to make drastic changes to the network which secures almost $1 billion worth of assets.

“Decentralisation often comes at the expense of speed,” Röder told DL News.

“As a result, many blockchain projects initially begin in a more centralised form and gradually transition to a decentralised model,” he said. “Polygon follows a similar approach.”

But perhaps the fact that Polygon is a sidechain, which has nothing to do with Ethereum, doesn’t matter for Deutsche Telekom that much. After all, the company’s not an Ethereum maximalist — it supports six different blockchains.

In addition to Polygon, Deutsche Telekom runs validators for major and minor blockchains including Ethereum, Q, Celo, Flow, and Energy Web. It also contributes to Chainlink’s oracle node network which helps DeFi apps receive data from outside sources.

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Running a validator node itself is not an overly complex task. Many are hosted in giant data centres run by companies like Amazon Web Services for a small fee.

However, many of the blockchains Deutsche Telekom supports don’t let everyone run a validator. You need a special invite for that.

In the case of Polygon, one of Deutsche Telekom’s recent additions, the network comprises only 100 hand-picked validators like Deutsche Telekom. In comparison, Ethereum, where anyone can spin up a validator at home or host one at a data centre, has over 700,000 validators.

‘Infrastructure, not asset management’

What Europe’s largest telecommunications company’s strategy from running validators is remains unclear.

Röder emphasised that blockchain technology presents a “valid business case.”

“The expression ‘valid business case’ refers to our business model. Deutsche Telekom runs web3 infrastructure and receives percentages of the rewards,” Röder told DL News.

But according to another Deutsche Telekom representative, the company does not stake any of its own crypto assets, and instead relies on others to do so and takes a cut of their rewards.

“Our business is infrastructure, not asset management,” the other representative said.

“We are getting paid to provide rock solid infrastructure to asset holders. Those people use our infrastructure to delegate their tokens and we receive a commission for our service from those rewards.”

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This week, it announced it was doing the same for the lesser-known Energy Web blockchain.

But some think that Deutsche Telekom buddying up with blockchains could be more of a marketing strategy than anything else.

“It’s interesting because they’ve been fairly active in crypto for years,” Santiago Santos, a crypto angel investor, told DL News.

Santos speculated on what might be behind the move. “Presumably, some angle to be relevant with their young user base,” he said.

It’s probably cool to run a validator.