In late 2021, two decentralized finance (DeFi) decentralized autonomous organizations (DAOs)—Fei Protocol and Rari Capital—set out on a path they believed would revolutionize the ecosystem through a transformative merger. The underlying concept was straightforward: Fei, with its algorithmic stablecoin, would combine resources with Rari, recognized as a pioneer in permissionless lending pools, aiming to form a unified DeFi powerhouse governed by a single DAO. Their respective communities rallied behind the proposal, culminating in December with the establishment of Tribe DAO.
However, just nine months later, the initiative had crumbled.
The abrupt collapse of the Fei-Rari merger sent shockwaves throughout the DeFi landscape. Yet, it was far from the only instance of DAO M&A that year. Other collaborations, including Gnosis and xDAI (viewed as a qualified success), Aragon and Vocdoni (considered a middling failure), and Yearn’s associations with Cream, Sushi, and Pickle, highlighted the continuing trend. Since 2020, over 65 deals have been executed by various DAOs striving to scale, merge, or consolidate, indicating that the state of DAO M&A is increasingly dynamic.
In contrast to traditional mergers and acquisitions (M&A), which adhere to established playbooks involving negotiations among corporate boards, structured financing by investment banks, and legal oversight, DAOs operate in largely uncharted territory. Governance can be chaotic, reliant on token holders whose votes yield unpredictable outcomes. This lack of a centralized authority means that important decisions can proceed without comprehensive community knowledge, exemplified by the Aragon community’s experience.
As outlined in the State of DAO M&A report, valuation processes remain opaque. The inherent volatility of DAO tokens complicates fair pricing for acquisitions, often leading to discontent among token holders. Furthermore, regulatory ambiguity poses considerable challenges, where the lack of legally binding standards can inhibit the execution of potentially advantageous agreements.
To navigate these challenges, DAOs have increasingly adopted token migrations and swap contracts as alternatives to quell regulatory uncertainties. Security remains a paramount concern, particularly as hacks can obliterate billions in value almost instantaneously—an issue painfully familiar to Fei’s token holders, who bore the brunt of an $80 million loss due to a Rari exploit.
Despite the promising notion of mergers, the reality sometimes falls short. For instance, Yearn Finance’s claimed mergers with various protocols were more akin to informal partnerships, resulting in significant confusion surrounding governance and responsibilities.
Nonetheless, there is a strong belief that M&A can serve as a powerful leverage for DAOs, allowing for more efficient executions and recognition of synergies unfathomable to traditional organizations. The future could see the emergence of standardized swap and acquisition contracts, platforms dedicated to M&A discovery, and conglomerates that foster richer, more integrated on-chain ecosystems.
This indicates that DAO M&A is not a fleeting trend; rather, the escalating complexity of Web3 ecosystems renders consolidation an unavoidable outcome. However, for forthcoming deals to yield success, DAOs must reconsider their M&A strategies. Enhanced governance alignment is vital, necessitating structured frameworks to synchronize stakeholder incentives and circumvent the internal conflicts that derailed Fei-Rari.
Thoughtful valuations are equally important, as a token swap diverges dramatically from a traditional cash buyout. Valuation models will need to consider token liquidity, governance authority, and the potential for future earnings. Moreover, prioritizing security through stringent smart contract audits and stress tests is essential to avert catastrophic exploits. DAOs must confront the intricate dynamics at play rather than dismiss them, investing in the necessary infrastructure and strategic partnerships to facilitate success.
If DAOs can garner insights from these early experiences, M&A could evolve into a vital tool for building resilient and scalable decentralized organizations.
However, the journey is still underway. Merging DAOs transcends merely combining financial resources; it entails a comprehensive integration of communities, governance structures, and technical systems in ways that enhance, rather than diminish, the value of these organizations.
The complete State of DAO M&A (February 2025) report, produced by DAOstar, Areta, and Emory University, is accessible here.
