While mergers and acquisitions (M&A) are a major component of any economy, especially dynamic and rapidly growing startup ecosystems let alone one as volatile as crypto. Yet they have been few and far between in crypto. Instead we have fast follow forks, vampire attacks, and VC funded copycats that hope burning cash for short term growth will win in a hyper competitive techno-meritocracy.
The main M&A examples we have seen are generally after hacks where a large project tries to salvage the team and TVL of the hacked protocol, they are hardly ever proactive with long-term strategy behind them. This is because there is no easy way to trustlessly merge/acquire a protocol. It is always an OTC deal that requires white glove service from the team being acquired, which assumes they are even around still. There is a huge gap in tooling and liquidity for teams to merge together and recycle value through the ecosystem in a positive-sum and regenerative way.
This creates a massive coordination failure in the crypto space where founders only option is to continue the living hell of being a crypto founder, rug pull and extract the value all the value you have created for yourself, or completely shutdown the project losing majority of the value created. This complete absence of optionality is combined with a lack of transparency on team operations and protocol management. At Debt DAO we’re all about solving multipolar traps and systemic coordination failures across the crypto ecosystem. Much like revenue-based debt-financing provides new opportunities for funding public goods and growth stage DAOs, we are also solving one of the biggest issues in the ecosystem, rug pulls.
By enabling trustless crypto M&A, we are creating new value exchange protocols that recycle value within the ecosystem by creating positive sum regenerative system instead of zero or negative sum outcomes. There will be higher trust that protocols will continue operating, less volatility in the space from massive collapses, more collaboration by default to facilitate future M&As, and less duplicative work because people have a new way to contribute value.
About Debt DAO
Debt DAO does economic and technical R&D on incentive alignment and coordination mechanisms that unlock new possibilities for builders and communities through alternative financing models. We are devoted to building public goods infrastructure that give DAOs access to cryptonative financial services available to traditional fiat b usinesses.
Our flagship products are the Spigot that trustlessly collateralizes onchain cash flows and a line of credit that lets DAOs continuously borrow against these cash flows. Together these create fully onchain credit infrastructure allowing DAOs to access business loans trustlessly, permissionlessly, and anonymously for the first time ever. Let’s explore how these two new primitives, primarily the Spigot, can also be used to create incentive-aligned onchain M&A markets for DAOs and protocols.
How The Spigot Facilitates Crypto M&A
There are two ways to do crypto M&As
- Buying a controlling share of DAO tokens on a DEX and utilizing meta-governance for activist investing
- Buying the underlying protocol from the DAO that currently controls it
Option #1 is practically impossible. Why is that? First off, acquiring a majority share via open market purchases is near impossible due to liquidity constraints. Even getting 10% of supply would be challenge without doing off chain OTC, aka a manual trusted process, and even then navigating DAO governance is the stuff of nightmares. Even if you did buy a majority share, very few DAOs actually have governance hooked directly into the protocol which means you don’t have agency to execute despite having “governance rights”. Because of this we’ll focus on Option #2 direct protocol M&A as it has more potential for the crypto ecosystem in terms of composability, incentive alignment, and actualizing change after the M&A process.
Much like restaking with ETH, the Spigot works by transferring ownership of your protocol to a smart contract and letting this smart contract control its operations and flow of funds. This is how we ensure trustlessness for buyers and sellers because the protocol and revenue streams are controlled by a smart contract instead of a multisig or DAO that can make arbitrary changes. Once staked to your Spigot, your protocol can be released at any time until the point it is purchased in the case of M&A, or your debt is repaid in the case of revenue-based lending.
Benefits of Spigoting your protocol:
- Leverage future cash flows to secure lines of credit to fund your business
- Stake multiple products/protocols into a single Spigot to manage operations
- Standardize and automate financial reporting across entire product suite
- Programmable protocol access control and operations via Hats protocol, Guild.xyz, etc.
- Modular architecture provides a flexibility for DAOs to customize their setup. You can compose Spigots together so each subDAO has their own spigot that splits revenue back to the main DAO
- Separate access control for protocol ownership from protocol operations
The last point is the most importantly for crypto M&A. The Spigot allows you to separate ownership and high level strategy and decision making from from day-to-day operations. This means that you can you can create owner/operator revenue-share agreements letting you delegate ops to a subDAO or auction off rights to whoever gives you the biggest split of revenue while retaining ultimate control of your protocol.
What is a Revenue Generating Contract?
You’ll notice we differentiate “protocols” from “revenue generating contracts” in the last sentence. A protocol is an immutable set of rules that define how to interact with crypto assets and onchain data, usually spread out across multiple smart contract. A revenue-generating contract is a specific contract within a protocol that receives fees from users and distributes it to service providers on the protocol like swap fees to LPs. Our docs site goes indepth into classifying types of revenue-generating contracts, the different types of risk with each, and how you can setup staking your protocol today.
Let’s dive in to how the Spigot provides benefits to buyers and sellers in rustless crypto M&A. We’ll focus on the benefits to founders and builders first since they are the most important people in the ecosystem. They are also the supply side driving the hardest part of the M&A market, actual value creation. They are the ones that research, design, build, market, and maintain the protocols and revenue-generating contracts that we all depend on on a daily basis.
Automated Data Dashboards
High quality Dune dashboards are the sign of a top-notch team in crypto. But that’s because it’s an esoteric platform that requires dozens of hours just to get onboarded, and even more to find data you want, create pipelines, format graphs, etc. etc. to create a respectable display. While this might be necessary for bespoke data relevant to a specific protocol, everyone has a need for reporting revenue and expenses. This should not require a data scientist and thousands of dollars, especially not if we believe in the tenets of DeFi about open, verifiable data.
When you stake your protocol into your Spigot, we automatically normalize your income statement so its easy to see:
- What contract create the revenue
- When it was collected + over what time period it was generated
- What token it was collected in
- How much was split between the protocol’s owner and operator
Without doing anything other than staking a contract in your spigot and running your protocol like normal, you give buyers the ability to run automated analytics, send inbound offers, and reduce the work you need to do sourcing deal flow and pitching on zoom calls.
Soft Rugs > Hard Rugs
At Debt DAO we’re all above solving multipolar traps and systemic coordination failures across the crypto ecosystem. Much like revenue-based debt-financing provides new opportunities for funding public goods (TK link to bitcoin space), trustless crypto M&A solves one of the biggest issues in the ecosystem, rug pulls.
Being a founder is an unloved profession in crypto where we build and public and have our tiniest mistakes spotlighted and blown out of proportion on a daily basis. It’s hard work even without that. Sometimes founders want to take a step back but can’t because there is no easy way to fill their shoes in an open, permissionless way without giving up complete control of their baby forever. Their options are to:
- Take what they can, cut, and run (hard rugs)
- Progressively decentralize (almost never works)
- Abandon the project entirely leaving everyone, including themselves, with nothing
- Raise VC money to hire a team to replace them, creating more work for themselves managing the original product + a new team + investors
- Get forked by a ponzi project with ridiculous incentives and vulture VCs
They all have their tradeoffs, but what if there didn’t need to be? By selling operator rights or the business outright - founders can outsource their work, get the payout the deserve, keep the product alive for their users, save face as a founder, and know that their work will continue to live on.
Soft rugs are a regenerative, positive sum way of recycling value within the crypto ecosystem. Instead of zero or negative sum multipolar due to lack of available tooling and financing, crypto M&A builds us all up together. There is higher trust that protocols will continue operating, less volatility in the space from massive collapses, more collaboration to facilitate future M&As, and less duplicative work because people have a new way to contribute value.
Revenue-based financing 💧 is Regenerative Finance 🌱 at its finest!
Growers > Showers
Staking your protocol to your Spigot is the first step to selling it. It’s also the first step to getting a loan against your cash flows. While waiting for buy offers, you can use the cashflows going through your Spigot to take a line of credit and finance growth operations, generating better metrics for your business thus making it more valuable and giving you a higher buyout price when a buyer does come along. If you don’t want to continue operating the day-to-day after you have initially built the product and brand, the owner/operator split in the Spigot empowered you to auction off the rights to operate your business, allowing you to earn passive income as an owner while others continue to grow it in the mean time. This gives you the time and resources to expand in other directions whether that’s new products for your existing business under a new Spigot or an entirely new venture that’s captured your passion.
This also helps mitigate vampire attacks by giving would-be attackers an easier way to siphon off value while making this “attack” productive and for you and your users. That’s the power of coordination mechanisms!
The automated data dashboard generated by Spigots mentioned above take a huge lift off o buys in addition to sellers that own the protocol. Standardized APIs across every project using Spigot for verifiable onchain analytics about business metrics means data analysts and data scientists can dive straight in instead of wasting time of sourcing and cleaning data. You can easily compare projects up for sale across various metrics like P/E, P/S, etc. even if they are in different sectors
On top of having clean datasets provided for you, they are are verifiable and derived from onchain data, organizations, and businesses. This gives you more confidence when buy by reducing fraud, facilitating valuations and negotiations, and
Dead Simple Trustless Acquisitions
One of the biggest issues with acquiring protocols or companies the actual handing over of the keys to the operation. There is significant counterparty risk for both sides, especially for buyers considering the technical complexity of protocols and that one missed module can mean the entire protocol can be recovered, exploited, or bricked after the acquisition is “done”. This counterparty risk goes to zero when a protocol is staked and escrowed in a Spigot with its operations codified in onchain settings with a history of transactions from the seller using that same config to manage the protocol and claim revenue. The metadata provided by Spigot configs lets buyers easily see what functions are needed to claim revenue, revoke ownership, or manage specific parts of the protocol on different revenue contracts contracts.
Once the seamless purchase and transfer is completed, the buyer will immediately start receiving recurring revenue streams to claim from the Spigoted bundle of revenue contracts they just purchased. If you simply want to own the business and not operate it, you can auction of operating rights like we mentioned earlier for purely passive income while you focus on non-technical aspects like branding and marketing.
Leveraged Buyouts (LBO)
This is where things got interesting. Combining trustless onchain credit with trustless M&A unlocks a whole new solution space for LBOs. Financing acquisitions entirely programmatically based off onchain analytics with no operational or legal overhead. This greatly reduces the costs to collaborate and consolidate in the space. Even better, your newly acquired Spigot will automatically be staked to auto repay your debt used from the acquisition!
Using a Debt DAO line of credit means you get a flexible repayment schedule, incentive alignment with lenders through RBF, and don’t deplete you cash reserves or dilute equity while making big moves in the space. Perfect for DAOs increasing marketshare or vertically integrating to increase profitability.
Debt DAO’s flagship products for trustless onchain credit, the Spigot and Line of Credit, are powerful primitives that will also enable another new market in trustless crypto M&A. They provide security, automation, data analytics, and operational efficiencies for DAOs and protocols that want critical financing to push their projects to the next stage. And they get this without diluting token holders, slogging through long fundraising sales cycles, filling their cap table with dead equity, and reducing their cost of capital.