At the end of 2021, two decentralized finance DAOs — Fei Protocol and Rari Capital — set out on what was intended to be a groundbreaking merger. The concept was straightforward: Fei, with its algorithmically-driven stablecoin, would collaborate with Rari, a front-runner in permissionless lending pools, to forge a dominant DeFi entity governed by a single DAO. The communities overwhelmingly backed the merger, leading to the establishment of Tribe DAO in December.
However, just nine months later, it was no longer in operation.
The collapse of the Fei-Rari merger reverberated throughout the ecosystem, but it was not the only instance of DAO mergers and acquisitions during 2021. Gnosis and xDAI (a relative success), Aragon and Vocdoni (a moderate failure), as well as Yearn and Cream/Sushi/Pickle (uncertain outcomes) all engaged in similar actions. Since 2020, over 65 deals have been undertaken by DAOs seeking to expand, merge, or consolidate. Presently, the landscape of DAO mergers and acquisitions is more dynamic than ever.
Traditional M&A processes have well-defined protocols. Corporate boards negotiate agreements, investment banks facilitate financing, and legal teams ensure adherence to regulations. In contrast, DAOs navigate a more chaotic environment. Governance structures can be disorganized, lacking a CEO to authorize transactions, with token holders casting votes that often lead to unpredictable results. Frequently, communities find out about developments only after the fact, as occurred with Aragon’s members.
As we learned while preparing the report, valuations can be obscure due to the volatile nature of DAO tokens, complicating fair pricing for acquisitions and meeting token holder expectations—as seen in the cases of Fei-Rari and Gnosis-xDAI. Regulatory compliance also poses significant challenges, as the lack of standards for legally binding DAO transactions hinders potentially beneficial agreements.
Consequently, DAOs are increasingly adopting token migrations and swap contracts to navigate regulatory ambiguity. Security risks continue to be a concern, with hacks capable of wiping out billions in value in an instant, as highlighted by the $80 million loss incurred by Fei’s token holders in the Rari exploit.
Moreover, some “mergers” are not true mergers at all; Yearn Finance’s publicized mergers with Yearn, Pickle, Cream, SushiSwap, and Akropolis were, in reality, a series of informal partnerships that led to significant confusion regarding governance and responsibilities.
Nevertheless, we firmly believe that mergers and acquisitions can represent a significant advantage for DAOs. Indeed, DAOs might be able to carry out M&As more effectively and uncover synergies beyond what any conventional organization could achieve. Envisioning standardized swap and acquisition agreements, dedicated platforms for M&A discovery, or protocol conglomerates could facilitate richer, more interconnected on-chain ecosystems.
Despite the hurdles, DAO mergers and acquisitions are set to persist. The rising complexity of Web3 ecosystems makes consolidation all the more likely. However, for future transactions to succeed, DAOs need to reassess their strategies regarding M&A. Improved governance alignment is essential, as DAOs must create structured frameworks that harmonize stakeholder interests and prevent the internal conflicts that plagued Fei-Rari.
More careful valuations are crucial, as a token swap differs from a cash buyout; assessment models should consider aspects like token liquidity, governance authority, and potential future earnings. Prioritizing security is vital, necessitating thorough smart contract audits and stress tests to avert catastrophic breaches. Additionally, DAOs need to confront these complex dynamics head-on, investing in the infrastructure and partnerships necessary to effectively manage them.
If DAOs can glean insights from these initial experiences, mergers and acquisitions could become an essential strategy for establishing resilient and scalable decentralized organizations.
Nonetheless, we have not yet reached that point. Merging DAOs entails more than simply combining two treasuries; it involves integrating communities, governance frameworks, and technical systems in ways that enhance the value of these organizations rather than diminish it.