Between tokens that replicate complex financial instruments like rehypothecation to many "a dog with a hat" type projects, there are a lot of tokens in the crypto ecosystem these days. Too many, according to some experts, who are predicting a wave of consolidation in the coming weeks and months.

With more than 13,000 tokens and about $2.5 trillion market cap, the question becomes - why are there so many tokens when the utilization and adoption of the technology are not even close to where it should be?

Enter mergers and acquisitions (M&A) which could help clean up the sectors such as decentralized finance (DeFi) to NFT projects and even memecoins, according to industry observers.

Similar to the late-90s dot-com era, heavy interest from venture capital and the general public during the 2021 bull run has led to capital flowing into too many different crypto projects trying to solve similar problems, creating more tokens than needed.

"Venture capital and excessive funding rounds during bull markets have led to the creation of a slew of projects often looking to solve similar challenges, just taking a slightly different approach," said Julian Grigo, head of institutions and fintech at smart-wallet infrastructure provider Safe.

Taking a cue from the traditional sectors such as the internet, semiconductors and health care, mergers and acquisitions (M&A) can solve the problem for crypto.

"There are already too many tokens and too many 'projects' for not enough adoption and utility," said Chiliz network CEO Alex Dreyfus, who previously said he is looking at "some aggressive M&A" this year. "Eventually, consolidation will be key," he added.

In fact, there is already a three-way merger that happened last month as artificial intelligence (AI)-related crypto projects Fetch.ai, SingularityNET and Ocean Protocol said they are merging to create one 7.4 billion dollar token that will make an AI collective to fight the Big Tech firms.

But that's just one recent example of somewhat large-scale M&A. Why aren't there more?

The simple answer might be that the industry is still very young and needs more time to reach a level where mergers can become more frequent. "The crypto M&A market is still in its infancy and, as such, there often isn’t a template or rulebook in place which can make deals more difficult and complex," said Safe's Grigo.

Another unique challenge to crypto is the nature of the token markets. "M&A is harder in crypto, because there is a lot of money in crypto trading and therefore, unlike traditional finance, where a ‘stock’ could die … crypto never dies. Everything is always a trading opportunity," said Dreyfus.

One way this can potentially be managed is by doing the deals at the token level rather than corporate, meaning each team "can work on their own initiatives while supporting and growing the same ecosystem. It will make more decentralized ecosystems and also have very powerful network effect," he added.

But that's not an easy task to accomplish, according to Shayne Higdon, co-founder and CEO of The HBAR Foundation, part of the Hedera ecosystem. "With crypto, where the ethos is open-sourced and decentralized, what are you actually buying or merging? Are you merging operations or just a token? The former is incredibly difficult to do when the business is centralized and will be infinitely harder in a decentralized world," he said.

“In crypto, it’s about growing the ecosystem and subsequent network effects. Having a common goal is paramount to ensure communities vote to merge. These communities also hope, as a result of a merger, that they will make more money in the long run," Higdon said.

M&A in crypto may lead to "short-term token appreciation," but may dilute value in the long-run. "Without the presence of clear, non-redundant roles and responsibilities for the company, teams, and personnel, it will be difficult to reach efficient, economies of scale," he added.

That's not to say the fundamentals of M&A can't work for crypto.

The first rule of any M&A would be to ensure synergies between the companies or projects and if the new company can get an edge over the competitors by merging. "From an infrastructure side, we will increasingly see interoperability play a crucial role in aligning these ambitions and likewise, I expect to see increased M&A activity amongst projects that share a common goal,” said Safe's Grigo.

Next would be figuring out the tokenomics and incentives for holders to vote for the deal - similar to how bankers would structure a merger or acquisition offer, may it be friendly or hostile. "For projects where founders, investors, or teams control the bulk of circulating supply, it is easy to negotiate the deal with a small number of players," said Oleg Fomenko, co-founder of the decentralized app Sweat Economy.

"Whereas for sufficiently decentralized projects, it is easy to launch a ‘hostile takeover’ making the offer for tokens to all token holders in order to accumulate a sufficient amount to influence the governance of the protocol," Fomenko added.

Other considerations are figuring out if a merger can increase the project awareness, reach a larger community, creating a stronger team to achieve a common goal, said Fomenko adding that lack of central medium to deliver a potential takeover offer as one of the biggest barrier right now for the Web3 ecosystem. In decentralized systems, you often don't know all the token holders. There's no proxy agency who can contact holders to get then vote - as there would be with traditional companies.

In traditional finance, one of the biggest hurdles for a deal to finish is the regulatory uncertainties. TradFi is littered with such high-profile M&A failures, including the more than $40 billion takeover of NXP Semiconductors by tech giant Qualcomm that failed after China blocked the deal. Another example was when Canada thwarted mining giant BHP Billiton's $39 billion hostile takeover of Potash Corp.

Crypto's relatively immature regulatory landscape could be a net positive for the industry, according to Sweat Economy's Fomenko. "Given the track record of Web3, it is likely to have the opposite effect and projects with significant treasuries, active teams, and communities are likely to take advantage of the current regulatory climate and acquire other businesses before M&A regulation emerges in this field,” he said.

Conversely, a better regulatory regime might incentivize bigger M&As as it could encourage larger financial institutions to step in as they'll have a better idea of how regulators will see a potential deal, according to Safe's Grigo.

So, if deal-making takes off in the digital assets space, what should investors be watching?

Naturally, projects that aren't able to compete with the larger competitors will look to merge their businesses to stay afloat. “The next wave of M&A is likely to occur in sectors where there is a high degree of fragmentation, like Layer 1 chains that didn’t break Top 10, DEXs, DeFi protocols, node operators, and possibly even NFT projects,” said Aki Balogh, co-founder and CEO of DLC.Link

Meanwhile, Safe's Grigo sees M&A playing out "right across the board," as he doesn't see any one specific area that is immune to consolidation. He also expects traditional players to scoop up Web3 projects that are "most innovative."

However, projects that are only high-quality will be able to garner top dollar for potential M&A. "The big winners of this trend are likely to become businesses that have very sophisticated cross-chain analytics capabilities as well as businesses able to deliver the message to the holder of the specific token about the potential offer," according to Sweat's Fomenko.

He said projects with higher liquidity that lack active teams could become targets of hostile takeovers. "I foresee that this will likely happen in the fields where technologies are largely similar between different players — decentralized exchanges (DEXs), collateralized liquidity providers, and liquid staking protocols. However, any project with a token that is a governance token might become a target."

Fomenko thinks that this might become a dominant force within the memecoin sector.

"My prediction is that this will reach a fever pitch in the world of memecoins where I foresee the emergence of 'ShibaPepes' and 'FlokiDoges' in no time.”

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