To Merge or Not to Merge
The potential of the biggest DeFi merger between Fei Protocol and Rari Capital
Context
The consolidation movement has started in the DAO space. In 2021, we had the $250 million merger between Polygon and Hermez and the one with Keep and Cypher. Now, we have the biggest DeFi merger in discussion, Fei Protocol and Rari Capital.
Let's take one step back first. When do mergers happen? The keyword is Synergy.
In financial terms, this means that the total revenue can be greater than the sum of the parts (1+1 = 3) and that the total cost can be lesser than the sum of the parts (1+1 =1).
Revenue synergy comes from new products, improvement of existing products and better distribution of current products. When the clients are similar there is a cross-selling opportunity.
Cost synergy comes from economies of scale and more efficient processes for building the product.
DAOs M&A has its particularities. In contrast with Corporate M&A, it usually does not have large teams to be integrated. Actually, the integration needs to happen between both core team members and communities.
DAOs merger is the fusion of two ecosystems.
The rate of failure in mergers is high in corporate history. The difference with DAOs is that we have lean core teams that are much easier to integrate and systems (codes) that are already highly composable. The challenge is more about how to integrate and have a new aligned big community with different stakeholders (users, core community contributors, investors, etc). In the end, many of the decisions depend on the DAO vote.
After this brief introduction, let's talk about the hot topic of the moment in DeFi, the potential merger between Fei and Rari.
Fei Rari Merger
The objective here is neither to discuss the price of the transaction nor the details that are being extensively discussed in the forums (if you are interested in the future of finance, I highly recommend you to read it here). I try to offer a strategic perspective on how this could be a win-win for both protocols.
What most excites me about the merger is that both protocols are well-positioned to serve DAOs. There are synergies between both communities as our “clients” are similar and we can solve DAOs financial needs. The DAO-to-DAO (D2D) market is huge and it is just beginning. D2D is the new B2B.
“The DAO landscape has seen incredible growth over the past 3 months. For starters, the total AUM controlled by DAOs increased from $7B to $15B” - Roberto Talamas
Source: Roberto Talamas
“At the beginning of 2021, only 12 DAOs had more than $1M in their treasury. Now there are 58 DAOs with over $1M in assets under management” - Roberto Talamas
Source: Roberto Talamas
Fei is starting to find traction in D2D with Liquidity-as-a-Service (LaaS) and Rari is attracting many DAOs to create their Fuse pools.
The question is: How can Fei and Rari together provide even more value to other DAOs?
Fei is a source of liquidity and Rari is the financial infrastructure for DAOs. I like the vision of a crypto central bank that provides the infrastructure for permissionless banking.
In practice, a DAO can have an enhanced product, a fuse pool with liquidity from Fei and with resistant oracles considering the LaaS partnership.
Fei and Rari can provide to DAOs:
a stablecoin for operational expenses
liquidity for their native tokens
resistant oracles
fuse pools to bring more utility for governance tokens
liquidity mining rewards for those staking native governance in the pools
With the merger, Rari receives liquidity and Fei a product with the traction to foster a growing natural demand for FEI.
This could be done without the merger, so the true potential is the development of new products together and the joint efforts in business development.
Talent fusion generating creativity power to build new products. This is the biggest value.
Having both teams and communities together in a more intense collaboration can lead to innovative products and new DeFi services. The Rari team has demonstrated an ability to create products with traction, such as the Fuse pool. I would love to see new products being developed with a focus on serving the DAOs financial needs.
Another benefit of the merger could be a joint effort to bring more DAOs as clients. They could share the same channel funnel for partnerships with DAOs. I see the potential economies of scale in marketing and business development with DAOs (e.g. cross-selling of products).
The biggest risks I see for the merger are:
Lack of focus and engagement from the DAO. In the end, we depend on votes to approve things. If the community is not aligned we may not approve new ideas.
Failure in attracting DAOs to use Fei Rari products
Unexpected difficulties to develop new products with traction
Conclusion
Overall, I am very optimistic about the potential of a Fei and Rari merger. To summarize, I see the potential of new products, enhancing current products (fuse pools) and economies of scale in business development & marketing.
It is important to design an integration strategy that contemplates many dimensions:
Core teams
Code
Communities
Growth & Partnerships with other DAOs
Communication during these steps is essential. There is a need for a vision for Fei and Rari together, a document that summarizes a strategy for this new DAO. This vision should be shared with both communities for discussion. The new DAO also needs a roadmap for integration in each front to align and better coordinate the efforts with all stakeholders. As an inspiration, I suggest reading the vision for Balancer Protocol.
Please note that this letter is not intended as financial advice.