At the Permissionless conference in sunny West Palm Beach, conversations around mergers and acquisitions in crypto were heating up as market players were starting to discuss this trend growing at the protocol level for decentralized finance (DeFi).
Panelists Nikita Ovchinnik, chief business development officer at 1inch; Vanessa Grellet, managing partner at Aglaé Ventures and Tom Schmidt, partner at Dragonfly Capital took to the stage with TechCrunch to discuss what DeFi M&A will look like as crypto market conditions become shakier.
Conference host (and my former employer) Mike Ippolito, co-founder of Blockworks, said while introducing the panel that though M&A happens often in the traditional startup space, it’s something that is being explored and pioneered in real time at the protocol level.
“I think we will see an explosion of M&A in DeFi,” Ovchinnik said. “M&A is ultimately a perfect tool [for] how you can scale and expand your product line and roll out the long-term horizon.”
Given the current bearish crypto market conditions, the panelists agreed that while some DeFi protocols can survive the downturns and continue to raise money, when that capital dries up, it’ll be harder to sustain themselves and there will be a lot more consolidation in the next two years.
In 2020, there were 118 crypto deals, which spiked 233% to 393 deals in 2021, according to a report by PwC. The average deal size rose 241% from $52.7 million to $179.7 million during the same period.
In December 2021, two decentralized autonomous organizations (DAOs), Rari Capital and Fei Protocol, merged via a token swap and were united under a new TRIBE token and the name FeiRari. At the time, Jeff Amico, a partner on the crypto team at Andreessen Horowitz, tweeted that the merger was “a new primitive to align incentives between web3 communities going forward.”
But it has been about six months since that merger, and clarity and guidelines around M&A in DeFi remain limited, the panelists commented.
“I think the M&A infrastructure just doesn’t really exist in crypto right now,” Schmidt said, adding that until the market matures, it’s going to be ad hoc in terms of determining how these actually happen.
“It’s the Wild, Wild West right now; there’s no framework,” Grellet said. “We can copy and paste the existing traditional finance framework, but I don’t know if that’s really what we want to do.”
DeFi protocols consolidating as market conditions worsen
On May 17, blockchain analytics platform Nansen announced the acquisition of Ape Board, a multichain DeFi dashboard. The deal was for an undisclosed eight-figure amount, Alex Svanevik, CEO of Nansen, told TechCrunch.
“We’ll never rely on M&A as a primary way to expand, but I do think that our portion of crypto, namely the information landscape, is ripe for consolidation,” Svanevik said. “It’s not great to have to visit 20 different websites for information.”
While Svanevik said there are a lot of opportunities for Nansen to explore acquisitions and partnerships, they’re “product and builders at heart.”
“We’re not investment bankers, so M&A isn’t our primary mode of expansion,” Svanevik said.
There’s going to be a lot of M&A activity going forward because there will be many companies in a position to acquire others — if they timed their latest raises properly, Svanevik noted. “Vice versa, the companies that maybe did not raise at the right time might end up running out of money in the crypto winter or bear market.”
Structurally different
As more DeFi protocols consolidate, there are several different categories of M&A to consider, Grellet said. There are private-to-private acquisitions with companies that don’t have protocols. Then there are instances where companies have protocols but are going to pay for deals with their native crypto tokens, she said. “Then you have the real M&A between protocols or protocols and foundations that want to integrate other tokens.”
When it comes to the structure of deals across DeFi, it’s important to consider the community, strategy and added value, Grellet said.
“When you look at the centralized exchanges, I think you will see a similar pattern, because on the protocol level and then on the DeFi level, everyone is looking to acquire wallets, apps, maybe media — the way Binance, Coinbase, FTX and those sort of companies have,” Ovchinnik said. “The M&A is going to be way more transparent and everything’s going to be done publicly.”
People involved in the DeFi protocols will also have a say in future M&A activity, as they often are community governed and operate on governance voting. “People will have to vote and their voices will be heard,” Ovchinnik said.
“How you’re going to engage with other protocols and what it means to come together is going to be very different,” Grellet said. “There’s not an M&A team that’s going to help you … everything is going to be driven by the community. So in essence, what’s going to be key to this is the governance of every protocol [to make decisions.]”
A lot of projects have solidified their market positions, but in order to scale beyond what they’ve already achieved and onboard new users into DeFi, they’ll have to think outside the box, Ovchinnik said. “We will see more action happening between protocols and between traditional companies and protocols.”
Additionally, the DeFi community is very global, so whoever uses one protocol will most likely have tried or have at least seen a competitor or something similar, Ovchinnik said. “So we won’t see a lot of horizontal mergers, but vertically and expanding the product lines, that’s going to happen.”
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