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Cryptocurrencies Have “Too Many Tokens” and Mergers Are Coming to Consolidate DeFi and Memecoin
Among the tokens that replicate complex financial instruments such as re-hyping in many “a dog in a hat” type projects, there are many tokens in the crypto ecosystem nowadays. Too many, according to some experts, who predict a wave of consolidation in the coming weeks and months.
With more than 13,000 tokens and speaking of $2.5 trillion market cap, the question becomes: why are there so many tokens when usage and adoption of the technology is not even close to where it should be?
According to industry observers, we enter mergers and acquisitions (M&A) that could help clean up sectors such as decentralized finance (DeFi) towards NFT projects and even memecoins.
Similar to the dot-com era of the late 1990s, strong 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 necessary.
“Venture capital and excessive funding cycles during bull markets have led to the creation of a number of projects that often seek 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 inspiration from traditional industries such as the Internet, semiconductors and healthcare, mergers and acquisitions (M&A) can solve the cryptocurrency problem.
“There are already too many tokens and too many ‘projects’ for insufficient adoption and utility,” said Alex Dreyfus, CEO of the Chiliz network, which previously said it was looking for “some aggressive mergers and acquisitions” this ‘year. “Ultimately, consolidation will be key,” he added.
In fact, there is already a three-way merger that occurred last month as artificial intelligence (AI)-related crypto projects. Recover.aiSingularityNET and Ocean Protocol have said they are merging create a $7.4 billion token this will create an AI collective to fight big tech companies.
But this is just one recent example of large-scale mergers and acquisitions. Why aren’t there more?
The simplest 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 is often no template or regulation that can make transactions more difficult and complex,” said Safe’s Grigo.
Another challenge unique to cryptocurrencies is the nature of token markets. “Mergers and acquisitions are more difficult in the cryptocurrency sector, because a lot of money is invested in cryptocurrency trading and therefore, unlike traditional finance, where a ‘stock’ could die… cryptocurrencies never die. Everything is always an opportunity for exchange,” Dreyfus said.
One way this can potentially be managed is to conclude deals at the token level rather than the company level, meaning each team “can work on their own initiatives while supporting and growing the same ecosystem. This will create more decentralized ecosystems and have also a very powerful network.” effect,” he added.
But it’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 cryptocurrencies, where the ethos is open source 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 more difficult in a future decentralized world,” he said.
“In cryptocurrencies it’s about growing the ecosystem and the resulting network effects. Having a common goal is critical to ensuring that communities vote in favor of the merger. These communities also hope, as a result of a merger, to be able to make more money in the long run,” Higdon said.
Mergers and acquisitions in the cryptocurrency industry may lead to “short-term token appreciation,” but could dilute value in the long run. “Without clear, non-redundant roles and responsibilities for the business, teams and staff, it will be difficult to achieve efficient economies of scale,” she added.
This is not to say that mergers and acquisitions fundamentals can’t work for cryptocurrencies.
The first rule of any M&A would be to ensure synergies between companies or projects and whether the new company can gain an advantage over competitors through the merger. “From an infrastructure perspective, we will increasingly see interoperability play a crucial role in aligning these ambitions and, similarly, I expect to see increased M&A activity between projects that share a common goal,” Grigo said by Safe.
The next step would be to understand tokenomics and the incentives for holders to vote for the deal, similar to how bankers would structure a merger or acquisition offer, whether friendly or hostile. “For projects where founders, investors or teams control the majority of the circulating supply, it is easy to negotiate the deal with a limited 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’ by offering tokens to all token holders to accumulate a sufficient amount to influence the governance of the protocol,” Fomenko added.
Other considerations include whether a merger can raise awareness of the project, reach a broader community, create a stronger team to achieve a common goal, Fomenko said, adding that the lack of a central means of providing a potential acquisition constitutes one of the biggest hurdles right now for the Web3 ecosystem. In decentralized systems, all token holders are often not known. There is no proxy agency that can contact the owners to then obtain the vote, as would happen with traditional companies.
In traditional finance, one of the biggest obstacles to closing a deal is regulatory uncertainties. TradFi is littered with high-profile merger and acquisition failures, including tech giant Qualcomm’s more than $40 billion acquisition of NXP Semiconductors, which collapsed after China blocked the deal. Another example was when Canada countered the $39 billion mining giant BHP Billiton hostile takeover of Potash Corp.
According to Sweat Economy’s Fomenko, cryptocurrencies’ relatively immature regulatory landscape could prove to be a distinct advantage for the industry. “Given Web3’s track record, it is likely to have the opposite effect and projects with large treasuries, active teams and communities will 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 could incentivize larger mergers and acquisitions as it may encourage larger financial institutions to intervene as they will have a better idea of how regulators will view a potential deal, according to Safe’s Grigo.
So, if dealmaking takes off in the digital asset space, what should investors be watching?
Naturally, projects that are unable to compete with larger competitors will seek to merge their operations to stay afloat. “The next wave of mergers and acquisitions is likely to occur in sectors where there is a high degree of fragmentation, such as Layer 1 chains that have not cracked the Top 10, DEXs, DeFi protocols, node operators, and perhaps even NFT projects “, said Aki Balogh, co-founder and CEO of DLC.Link
Meanwhile, Safe’s Grigo sees M&A taking place “at all levels”, as he doesn’t see any specific area that is immune to consolidation. He also expects traditional operators to pick up the “most innovative” Web3 projects.
However, projects that are only high quality will be able to raise significant amounts for potential mergers and acquisitions. “The big winners of this trend will likely become companies that have very sophisticated cross-chain analytics capabilities, as well as companies that can provide the holder of the specific token with the message about the potential offering,” according to Sweat’s Fomenko.
He said projects with more liquidity and no active teams could become targets of hostile takeovers. “I predict that this will likely happen in fields where the technologies are largely similar across different players: decentralized exchanges (DEXs), collateralized liquidity providers, and liquid staking protocols. However, any project with a token that is a governance could become a target.”
Fomenko believes this could become a dominant force in the memecoin industry.
“My prediction is that this will peak in the memecoin world, where I foresee the emergence of ‘ShibaPepes’ and ‘FlokiDoges’ in no time.”