Last week, two major decentralized finance (DeFi) protocols proposed an ambitious merger that could create a lending and liquidity powerhouse.
Untangling the details of how to combine two decentralized entities, however, is proving to be a complicated affair.
On Nov. 16, Rari Capital co-founder Jai Bhavnani and Fei Protocol founder Joey Santoro each made a proposal in their counterpart’s governance forums: combine lending protocol Rari and stablecoin protocol Fei via a token merger agreed upon by each’s decentralized autonomous organization (DAO) governance.
The joint protocols would immediately command over $2.4 billion in total value locked (TVL), provide a unique combination of stablecoin minting and money markets, and serve as a proof-of-concept for future DeFi mergers – a trend that was widely predicted to flourish at the end of 2020 but has largely failed to materialize due to inherent DAO complexities.
A DAO is a group of people on the internet using various tools to exercise governance decisions in a variety of areas.
In Fei and Rari’s case, a number of factors stand in the way, including a pair of investor communities suspicious of one another, a token exchange rate that is the subject of some scrutiny and a number of details at the “social layer” that requires mutual trust.
However, both teams believe not only that the merger is the best way forward for their respective protocols, but that they can also push it through.
“This is not a done deal, but the core teams are committed to this,” Santoro said in a Fei community call last Thursday. “A treasury swap’s not good enough. We want to be fully incentive-aligned to do this together, to build really powerful integrations that aren’t just surface-level, and that only happens when you’re working under the same token.”
On a surface level, a merger makes natural sense.
The two protocols are already closely aligned. Many of Rari’s lending pools accept both Fei’s stablecoin, FEI, as well as the project’s TRIBE governance token, and this usage has allowed Fei to put its foot in the door of a stablecoin market largely dominated by USDC, USDT and DAI.
However, both teams believe a deeper integration could boost these synergies significantly.
Rari’s Jai Bhavnani framed the merger as one that could bolster Fei’s usage and simultaneously enable immediate liquidity in lending pools – an all-in-one combination of liquidity and utility as a service that few other protocols could match. Both teams declined to speak to CoinDesk, pointing instead to communication in public channels.
“The question should be, ‘How is this going to create a bigger entity than us staying independent?’” said Bhavnani on the community call. “Us verticalizing all of DeFi, products like FEI bootstrap becoming a priority – I think everyone should get hyped up for this, because it’s going to be a complete game-changer.”
In his post on Rari’s governance forum, Santoro said that Fei can help Rari solve oracle availability bottlenecks, and that both projects will encourage usage for one another, as well as for exotic, long-tail assets in the DeFi ecosystem seeking to bootstrap liquidity.
“As more pairs begin to form against FEI, the network effects grow for Fuse and FEI to list more assets and more pools with more utility for each,” he wrote. Fuse is a Rari protocol for creating permissionless money markets.
Before this vision can come to fruition, however, the teams need to convince token holders to vote for it.
In the hours after the proposals were first posted, the initial reaction from investors was decidedly mixed as each community expressed concerns the other could weigh token prices down.
As part of the proposal, Fei would issue TRIBE tokens in exchange for Rari’s RGT tokens at a $1 to $1 rate, as well as pay off Rari’s debts related to a previous hack.
“I want further discussion on this topic. I really love Rari, but I am not sure how I feel about assuming Rari’s hack liabilities,” wrote one user on Tribe’s governance forums.
Other Fei community gripes focused on the market cap for RGT relative to TVL compared with other lending protocols, potential TRIBE dilution and the rate of RGT/TRIBE conversion.
Likewise, on the Rari forums, RGT holders expressed similar concerns.
“This proposal is so heavily weighted towards TRIBE that this feels like a scam proposal,” wrote one investor.
However, many third parties came out in support of the merger, applauding both the natural match between the protocols and the ambition to attempt one of the largest DAO-on-DAO acquisitions in history.
The teams both said that initial mutual distrust from token holders makes sense.
“The gut reaction was, ‘My bags are great and I don’t want to mix them with any other bags.’ What we’ve seen is that neutral parties or people who hold both TRIBE and RGT are absolutely fucking stoked about this, and it’s people who have one or the other and don’t understand the other community – they’re asking hard questions and pushing back,” said Fei’s Santoro.
Likewise, Bhavnani framed many of the concerns in terms of bagholder bias – a term for when crypto holders grow overly fond of the assets they hold and often behave in a cultlike manner.
“Each of our communities are extremely cult-like – and that’s fucking awesome. People sharing their feelings, people sharing their concerns, that means these are strong communities that care about these things, and that’s the best thing a DeFi project can ask for at this stage,” the Rari founder said.
Bhavani said that both teams don’t want to “trivialize” concerns and that he hopes to work with both communities to rally investors around to the vision of a DeFi superpower.
Hierarchy and administration
Merging DAOs additionally comes with a number of questions concerning hierarchy, workflow and decision making.
When asked about who would serve as the leader or de facto CEO of the joint venture, both founders pushed back against the notion of needing a clear leader at all.
“I think that’s a really unfair question. Neither of us is running the protocol – it’s a DAO, and a DAO is going to be made of teams and different core contributors. It’s based on context and on token-weighted voting,” said Santoro.
In practice, DAO organizations without a leader can sometimes stumble – Synthetix founder Kain Warwick had to re-enter a leadership role for the synthetic asset protocol after stepping away earlier in the year.
Nonetheless, the teams argued that DAO incentive structures would be enough to ensure an orderly transition.
“We have this one financial instrument that value-aligns these two teams. Technically, we don’t even have to talk to each other – we just can keep our heads down and we’ll both be working to maximize value for the token,” said Bhavnani.
The best example of what that might look like in practice is MakerDAO. The stablecoin protocol disbanded its legal entity in 2021 and is now run by semi-cloistered core units.
In the absence of a unified vision, MakerDAO governance proposals are often hotly contested, however.
While to some that rancor may be a sign of dysfunction, some DAO experts say that disagreements – even heated ones – can be healthy.
“If there are disagreements, that’s governance – I think [Compound governance contributor Getty Hill] put it beautifully on a Compound governance call, ‘Votes are passing too much, too damn much,” said Santoro.
Details and decisions
While the initial proposals in the governance forums were short and to the point, a host of teams have stepped in to help flesh out the details.
“I think it’s a really novel idea for you guys to merge, and I was looking at this package of, ‘How does this work? What does this mean? How does this functionally occur?’” Hill, also the founder of crypto development lab GFX, said on the Thursday community call.
Hill noted that the merger requires a “lot of social consensus,” and GFX spent a day drafting a DAO merger agreement, filling out at a high level what was lacking in the proposals. The firm is now playing a key role in fleshing out the details of the merger.
“We’re just trying to fill in all the points that no one thinks of, doesn’t want to talk about, or aren’t addressed with what we think is the most neutral way to proceed. We’re just here to help this thing along,” Hill added
The team plans to make this template available to the communities as they look to move forward.
Likewise, Llama, a DAO tooling organization, has stepped in to address the pricing of the RGT/TRIBE token transfer.
In a post in both governance forums co-authored by a number of contributors, Llama founder Shreyas Hariharan proposed a dual transfer method: a 14-day time-weighted average price for RGT’s conversion to TRIBE, and a yearlong vesting “success token” that would allow holders to exchange RGT for TRIBE 50% above the TWAP price after a year.
Despite the many moving parts and dangling loose ends yet to be addressed, both founders continue to express optimism regarding the success of the merger.
Should all the complications be untangled, the end result could be the most successful instance of a DeFi merger to date – a key step in legitimizing DAOs as competitive organizational entities, and a possible template for consolidation in a notably fractured industry.
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