DeFi Consolidation - Diving into the mStable-dHedge Acquisition
DeFi Consolidation - Diving into the mStable-dHedge Acquisition
Another large DeFi milestone
Welcome back to the Aspiring Degen. The acquisition of mStable by dHedge has been confirmed by governance which is another exciting milestone in the world of DeFi.
As an ex-tradFi bro, it was a no-brainer to dive into this and there will probably be multiple takes of this as time goes on, let’s take a look.
I have been silently following along with the mStable governance since they proposed that they were open to being acquired or sunsetting the protocol. The developments have been interesting, to say the least.
Multiple protocols were interested, such as Index Coop, Spool DAO, Idle Finance, and Origin Protocol, but ultimately, dHedge came through with a winning proposal.
Overview
dHedge will acquire mStable and migrate the protocol services to Optimism to generate more successful yield strategies than it previously has been generating. The mStable governance will be consummated by dHedge until a new MTA governance process is in place.
This differs from prior mergers such as Rari-Fei and Threshold-Keep considering that a new entity won’t be created; dHedge will take over the operations of mStable and have the mStable multi-sigs transferred to dHedge.
Before we dive deeper into the acquisition you need to have an understanding of what these protocols do and how there is a natural synergy.
What is mStable?
mStable is a yield protocol that focuses on delivering an architecture for yield-bearing tokens by depositing the underlying tokens into yield strategies across DeFi. mStable operates their native stablecoin mUSD which consists of a basket of assets that are deposited into these strategies, by converting mUSD into imUSD users can hold an interest-bearing version of the stablecoin that benefits from the DeFI yield strategies and also earns MTA rewards. The protocol also operates mBTC which works in the same fashion as mUSD.
What is dHedge?
dHedge is an asset management protocol that allows you to deposit your capital in automated strategies to manage your capital. Users have the opportunity to use strategies already working on the platform or deploy their own strategy based on preference. dHedge has heavily integrated Toros Finance and mainly uses its automated strategies to generate yield for depositors. While the protocol is multi-chain as it operates on Ethereum and Polygon, it has found the most success on Optimism thus far.
Reason for Acquisition
Core contributors of mStable voiced their concerns that their burn rate was too high and the project was facing structural challenges. The project was not earning enough money to self-sustain and was about to run to the ground as the runway would be depleted in 12 months. The following options were available in the governance proposal:
Propose an acquisition and let other DAOs present their offers
Shutdown the project
After 4 weeks of intense negotiations and proposals from different entities, dHedge came through as a winner on March 30th which is the date the deal is based upon along with the upcoming calculations below.
Why does this make sense for dHedge?
dHedge needs more asset management strategies to scale its protocol and TVL. By acquiring mStable they can incorporate their meta vaults into their platform and use it as a primary source for stablecoin yield for capital allocators. mStable sits on a treasury worth $2M and this capital can be deposited by dHedge into other in-house strategies and aim to grow the total TVL and treasury value of their protocol.
Why does this make sense for mStable?
mStable gets acquired by a protocol that wants to continue its operations and see it thrive by improving its token performance and making it more connected to the success of the mStable vaults. They plan to offer a “floor price” for the MTA token (essentially the value at which it can be converted into stablecoins by dHedge (buyout value)) and leave it open to an increase in value if it performs well. This indicates a strong sense of confidence from dHedge to make mStables products profitable.
Structure of the Acquisition
How was the deal structured that allowed dHedge to get the winning bid? Let’s take a deeper look at the numbers.
There are multiple things to factor in here:
Value of MTA token
Treasury value
MTA tokens held by the treasury
MTA tokens held by subDAOs
The value of the MTA token at the time of the proposal passing was trading at $0.026 at a market cap of $1.3M.
The treasury value amounted to 2.36M but this included the MTA that was held by the treasury and should not be included in the purchase value of the protocol.
Thus, the eligible MTA in this acquisition was calculated as follows:
With the MTA in the treasury supposed to be subtracted from the total treasury value the total treasury value equals $2,089,540. dHedge estimate that a rough amount of $150,000 of costs will be incurred during the acquisition process and have deducted this from the treasury value to reach the final amount which is $1,939,540.
(2,089,540 - 150,000 = 1,939,540).
This is the total redemption value and was divided by the total eligible MTA supply to determine a price at which MTA holders can redeem their tokens for USDC.
1,939,540 / 64,614,609 = $0.03
dHedge is buying out every MTA holder at a price of $0.03.
Vested tokens will continue to unlock considering they already have purchased their tokens while MTA emissions will stop.
mBTC will also be sunsetted and converted into USDC due to the limited traction of the product.
Acquisition process
The mStable team will transfer the multisig to 3/5 key signers at dHedge. When the transfer is completed the dHedge team will liquidate the mStable treasury for USDC and then be placed in a mStable treasury vault that will earn a yield on stablecoins on Optimism.
dHedge has also onboarded some of the mStable team members to offer expertise on their meta vaults and continue growing the projects for the new roadmap initiated. y dHedge.
The importance of fairness in DeFi Mergers
M&As in DeFi differ widely from how it works in traditional finance where there is a higher emphasis on fairness and getting a very good deal for both sides. If a fair deal is not struck, the community could easily vote to sunset the protocol and instead aim to claim their “right” to the treasury that the protocol has generated.
This is among the fairer deals that we have seen in DeFi so far and rightfully takes into account the treasury value that the protocol sits on instead of solely basing the token buyout price on market cap and token price as we have seen in previous mergers. Relying on market price is highly inefficient as you can’t assume that the market is rational and you have to decide a fair time (TWAP) period to base it on.
What was the alternative?
All offers on the table were as follows:
dHedge - Purchase based on treasury value and provide a reliable price floor that MTA can be redeemed for over time while maintaining the token leaving room for appreciation (how appreciation will be achieved is unclear apart from aiming for better yield performance on treasury).
Origin Protocol - Purchase based on treasury value + offering 50K OGV tokens for MTA holders. Treasury gets converted to OUSD.
Idle DAO - No-aligned token holders can exit at a redemption value of 0.03, aligned token holders claim 1.7M IDLE ($700k) tokens with 3 months cliff and 6 months linear vesting in return for MTA and Idle claims treasury. Based on the future performance of TVL, aligned token holders can claim an additional 1.3M IDLE ($540k).
Spool DAO - MTA market cap-based purchase ($1.3M) paid with SPOOL tokes with a 1-3 month cliff and 3-6 month vesting period with a potential additional 300k in upside paid in Spool based on performance.
The fairest deals that provide the most liquid avenues and require less speculation are the ones from dHedge and Origin protocol and it is no surprise to see that these two were the ones with the highest amount of votes.
Not taking into account the other protocol offers the other alternative was to shut mStable down and distribute its liquid treasury to MTA holders. We have recently seen other protocols proposing this such as Rook and it acts as an option when a protocol sees no way out and there is no interest in an acquisition (or if the community is extremely unhappy with proceedings). Considering this acquisition went through, I expect more protocols that don’t see a bright future ahead of them to open their doors to M&As and it fits one of my theses that we should see multiple protocols consolidate during the bear market.
Either the protocols realize it themselves or larger actors act proactively by identifying opportunities where there is weakened morale in the community due to protocol performance and offer a better alternative.
Development since Rari-Fei
There has been an improvement in making a case for protocol value and the fair price of a token buyout in this merger. As more talent enters the DeFi industry we will see these deals becoming increasingly more sophisticated over time allowing us to develop best practices to operate from.
While the prospect of M&A previously has been mainly between 2 protocols, it was interesting to see multiple protocols getting involved and seeing the value in this deal. Navigating deals with stablecoin-based protocols becomes more transparent as it is easier to calculate the fair value of all assets at hand and performance as they are subject to less volatility.
However, I was surprised not to see more protocols involved such as redacted cartel and other meta-governance protocols (to be fair Index Coop was involved in the early stages but pulled out).
There are apparent inefficiencies we will have to live with that makes this fascinating as well considering everything is being built in the open. There was a clear arbitrage opportunity available when the proposal was close to passing by buying MTA < $0.03 and making a sizeable profit when it will be redeemed by dHedge (the price was hovering around 0.025 before the proposal passed). There is no reason to hold the token for a price >0.03 as the current performance state of MTA services doesn’t warrant it although that could change in the future.
It’s also becoming ever apparent that fairness trumps value maximization in DeFi mergers as you have a large community to cater to as well.
Conclusion
This deal is a step in the right direction regarding doing an M&A deal in DeFi that is deemed reasonably fair for both parties. MTA token holders get to redeem their tokens for a respectable value while they hope that dHedge can deliver a more profitable product for users.
There has previously been a question of what you are acquiring during a DeFi merger. The vast majority of protocols do not have a strong brand value and maintaining and growing your treasury is of utmost importance when the market environment isn’t strong.
Thus, finding deals that are deemed “cheap” in a bear market is the ideal way to reach deals that has the potential to grow protocol TVL and treasury value in the long run. In a bull market, it makes more sense to pay with tokens as prices go up and everybody can share the burden of volatility, in a bear market optimizing for securing value is preferable and USDC is the better option.
It is also hard to argue that mStable did not get the most value for the protocol based on the offers on the table which imply that the protocol value maximized and has given their token holders a fair deal.
I expect an increase in consolidation in the industry and protocols might want to take the chance to capitalize on getting “cheap” deals during the current market environment.
However, I could well be wrong so let me know what you think anon.
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