The bear market has left many decentralized finance (DeFi) projects struggling for survival – and some are running out of options.
Cash is at a premium in crypto right now. High interest rates have made borrowing more costly and venture capital funding is drying up after a long stretch of plenty. According to a Pitchbook report, funding for blockchain startups in Q1 this year amounted to $2.4 billion – down 80% from a record $12.3 billion in the year-ago period. Meanwhile, the collapse of Silicon Valley Bank and other backers of young tech firms has the industry on edge.
On top of that, crypto markets are still licking wounds inflicted by the demise of high-profile projects such as Celsius and FTX. And while the more spectacular implosions were triggered by flaws stemming from centralization, conditions have worsened across Web3. This has made the going tough for smaller projects that are tight on funding runway.
So what’s the solution? It’s time to band together: Mergers and acquisitions (M&A) offer DeFi projects with strong business models a viable way to ride out tough market periods like this one.
What Does M&A Look Like in the Current Landscape?
Many projects are already going this way. According to the latest quarterly report by crypto analysis firm Architect Partners, crypto M&A deals hit a record high of 54 in the first quarter of 2023 with Web3-Web3 agreements picking up momentum. If this pace continues, we stand a good chance of beating last year’s record 203 transactions.
M&A deals tend to fall into two broad categories. There are consolidation buys, where a company acquires a rival to add clients, increase revenue and value, and, in the case of investment firms, boost liquidity. And there are complementary purchases designed to equip projects for the next phase of growth by opening new markets, or by bringing in new skills and technological capabilities.
Payment network Ripple’s purchase of Swiss digital asset custody and tokenization technology provider Metaco for $250 million in May is a clear consolidation buy. Acquiring Metaco, which helps financial and non-financial companies build digital asset operations, will allow Ripple to diversify into custody solutions for institutions.
I see a possibility of both deal types climbing in coming months, particularly among smaller projects that need to find a way to sustain themselves until the next crypto summer.
Nor am I alone in believing this.
Sendi Young, Ripple’s European managing director, predicted early in 2023 that there would be an upswing in crypto acquisitions by buyers from within Web3 and as well as traditional finance (TradFi), which she says is coming to understand – and covet – Web3’s strengths.
In the space I know best – structured products – the M&A tempo has been less hectic, due to a few factors.
For one thing, there aren’t many structured product projects in DeFi. This is partly because although structured products are an enormously popular investment vehicle in TradFi, they are a relatively recent arrival to Web3. Many blockchains – particularly newer ones – don’t yet have any providers in their ecosystems.
Because the field is still small, the handful of entrants operating right now are strong and look likely to stay that way without buying up competitors.
There have been a few deals in the wind, however.
PsyFi itself reached an agreement in April to buy Katana, a yield generation platform on our native network, Solana. And we believe there are sound reasons for DeFi structured products companies to take a good look at pairing up in the current market climate.
Acquisitions allow projects to increase total value locked (TVL), a closely watched DeFi yardstick that measures the amount of capital deposited or staked in a project, whether as liquidity in trading pools, loan collateral, or for other purposes. Since investors look to TVL to determine project health, high TVL often attracts users.
More consolidation also means less fragmentation of liquidity among providers, which means more notional value in assets underlying each venue’s structured products.
And since there are certain market makers or institutions that will only bid on structured products when they reach a critical threshold of notional value, more capital increases the chances of attracting institutional investors.
For structured products, pre-packaged hybrid investments comprising different assets including one or more derivatives, more liquidity generally means better performance.
From a marketing standpoint, acquisitions are a great way to show that a project has staying power – that even in a bear market, they are still strong, actively building and evolving, even when competitors have called it quits.
But acquisitions aren’t the only way to show commitment, fill gaps or bolster liquidity. Strategic partnerships, integrations or collaborations can help in these areas as well, positioning well-managed projects with compelling offerings for future growth.
In fact, even if the M&A trend takes time to seep into structured products, I foresee a rise in partnerships as founders with great ideas put their heads together on ways to accelerate the shift to greater product sophistication.
Now more than ever, it is time for teams to combine strengths to ensure they can continue to offer exceptional financial services and tools to users everywhere.
About the author
Taylor Johnson is co-founder of PsyFi, the largest provider of structured products and tools on the Solana blockchain.
Sourced from cryptonews.net.