Finance Redefined: What’s a DeFi merger, anyway? Nov. 25–Dec. 2
The biggest events in DeFi this week all involved Yearn.finance, the yield farming optimization protocol. I covered the first, Pickle Finance, in my last installment.
Since then, we’ve seen integrations with Cream Finance, a lending protocol similar to Compound; Cover Protocol, an insurance provider that recently paid out users for the Pickle hack; Akropolis, another protocol primarily dealing with yield optimization; and as the most significant of all, SushiSwap, the decentralized exchange born as a Uniswap parasite.
The Yearn ecosystem now includes all the major building blocks of DeFi (yield, lending, exchange of assets), especially thanks to the Cream and SushiSwap integrations.
But I’m sure many will have questions about what’s going on here. How can there be mergers among decentralized protocols? Who decides on them? Are they actual mergers?
The comparison with a corporate merger
I think that the key to understanding these events is looking at what happens during a traditional corporate merger.
From a practical perspective, two companies merge for fairly obvious reasons. For horizontal mergers, it’s usually about expanding total market share and consolidating development. Think about Fiat-Chrysler merging with the Peugeot-Citroen group, or any other car company merger — their cars become virtually the same after the union.
A vertical merger instead unites different companies into one vertically integrated stack — for example Disney joining with ABC back in the 90s. Their products are usually different but may be still part of the same supply chain, thus benefiting from being combined as part of a single company.
We saw both types among Yearn’s five mergers. Akropolis and Pickle Finance are very much like the car company mergers. The absorbed protocols will build their “cars” (yield strategies) on Yearn’s platform, making them functionally the same. At most there should be some differences in taste — similar to how an Audi targets a different niche despite usually having the same platform as a Volkswagen. Maybe Pickle’s strategies will have higher risk than Yearn’s?
The vertical merger is what we saw with Cover, Cream and SushiSwap. Here we see pretty clear synergies between Yearn and each of these protocols. Yearn yield strategies will now use Cream lending to enter leveraged positions, and if they need to swap some tokens, they’ll use SushiSwap. Finally, Cover will provide insurance on these products for those who want it.
But the thing is that these product integrations are not enough to constitute a merger on their own. For example, Renault and Nissan have been sharing technology for the entirety of the 21st century without formally entering into a merger.
An actual merger requires either the creation of a new integrated company where the existing shareholders are bundled together or, at the very least, one company “buys” all of the other’s circulating shares by exchanging them with its own. Only the SushiSwap integration comes somewhat close to this definition.
The financial aspect of Yearn’s “mergers”
In the case of SushiSwap, the collaboration will involve exchanging part of each other’s treasuries for the partner’s tokens. The two protocols are still very much independent, and you will note that “exchanging part of the treasuries” is not “replacing all SUSHI with YFI or vice versa.”
The lack of actual financial relationships is perhaps the biggest reason why none of these mergers — except for SushiSwap — were ever put to a vote. You don’t really need to throw in any DeFi term to explain what happened here. More than true mergers, these are simply tight partnerships — in the corporate world, partnerships are usually not decided by shareholders.
Indeed, I am somewhat curious why these “mergers” were necessary in the first place. Yearn strategies are using other platforms like Maker and Curve perfectly fine without any merger — that’s what the permissionless nature of DeFi is all about. Although in Maker’s case Yearn did need to request access to Maker’s oracle.
Perhaps the bigger point is what will come next: The union of development teams to build new products. That, once again, can also happen in the context of a partnership.
I suppose “merger” sounds much cooler than “partnership,” though a “DeFi protocol partners with another DeFi protocol” headline is just as interesting, in my opinion. But it’d also be weird in a sense — how can a decentralized protocol partner with another? Well, it’s all about the development teams’ decisions to do that. That shouldn’t be too surprising. Every decentralized team is still a list of names and surnames just like the staff of a traditional company.
The question of whether a “decentralized” development team should be taking these types of decisions is a philosophical debate I’d rather leave to the readers.