A few weeks ago, dHedge and mStable, two DeFi projects merged adding another case-study to the shared lexicon around how to navigate this new realm of token restructuring and M&A in crypto. Huge props to James and the mStable team for recognising that the correct thing to do was to gracefully move on rather than run the project to zero. There’s probably less than 20 people in the world who have experience with publicly restructuring a token and you get to hear 3 of them speak in this podcast episode.
Here’s a link to dHedge’s Twitter
Here’s a link to mStable’s Twitter
Here’s the governance forum post where it all went down
0:00:00
Speaker #1
Thanks James and Ermin for jumping on. Would love to learn a bit more about the background of like mStable and dHedge and then we can get into the merger and how it all came together. So James I'll pass it over to you.
0:00:24
Speaker #2
Background to all of this, Was that M stable hs been around since 2019, launched 2020 and we had some great growth. But then really at the start of this year we realized that there was an opportunity to merge or be acquired by a bigger player or a player with a better balance sheet than us and it was really a community led decision. I posted some concerns about the direction of the project and its sustainability on our forum. And then it got picked up by the community. That kind of led to other community members and core contributors creating posts and and that that that ultimately led to to to an acquisition which I'm sure we're going to get into. But yeah, that that's kind of a bit of a quick background.
0:01:24
Speaker #1
Sure. And do you mind like getting a quick background like what mStable actually did and kind of like the products that you guys had?
0:01:31
Speaker #2
Yeah, absolutely. So mStable was originally a project to build a meta stable coin, and the idea was that individual stable coins have a bunch of risk and also aren't that capital efficient. So we could create a a better kind of stable coin that was more capital efficient that could generate a better yield and also have a diversified risk profile that kind of evolved that idea evolved along with defies evolution and.
Then at the end M stable became a really a more generalizable Yield Products suite. Our flagship product was called Save and that was for to earn a great yield on stable coins and but then we evolved to building a product called meta vaults which was a more generalizable way of creating baskets of different yield generating products.
0:02:39
Speaker #1
Cool. And then I would love to pass over to you like a quick background on dHedge, the product, and then how you guys kind of like came into the story here?
0:02:49
Speaker #3
Yeah, I mean so yeah, we dHedge launched in 2020, so similar time is mStable and had some like common investors and and and parties and that's how we kind of met from early on and we were kind of in the conversation from early on and. Yeah. And stable was really kind of innovated with its original MUSD product. So we always kind of followed followed along. dHedge is an asset management protocol and the problem that we wanted to solve or the problem we're looking at is really just inefficiency of tradition Trafi asset management. It's super inefficient, very expensive and for good reason there aren't, you can't have hard protections the way you can with the theory of smart contracts.
For users funds, you know these things are custodial, which means whoever has custody of those assets in tried fire world can do whatever they want with them. And we've seen how that's played out both with in centralized like exchanges, but also like in in traditional finance things do go wrong for one reason or another. So having that hard coded in smart contracts, having it fully transparent just made a lot of sense.
And yeah, that was the original thesis that there's a lot of potential out there, a lot of great managers. And to really unlock that potential. And we've also decided we'll we'll focus on a lot of mated strategies and launched Taurus Finance. And yeah, we spoke with them. Stable would have been, I think, over a year ago. And then we realized, hey, hold on, we're kind of like doing very similar things here. And so, yeah, maybe I'll just leave it there. I guess that'll tie into the merger.
0:04:28
Speaker #1
Cool. Yeah. So there's of course, like the unstable community saying that like, hey, there's like some of these problems and like, I guess the problems that also opportunity. So how did, like, say the discussions kick off? Was it like kind of people, like kind of more backroom dealing? Was it more public? Like, how did that really play out? Yeah, I mean, it was fully.
0:04:53
Speaker #2
Transparent at a pretty early stage.
0:04:58
Speaker #2
The challenges with mStable started when the community kind of realized that the meta stablecoin product wasn't going to reach a huge kind of product market fit it. It reached some level of scale. I think at the top there was about 200,000,000 at MUSD, so there was some demand for the asset. But we didn't really feel like it was sustainable demand. I think it was on the back of a lot of that yield farming and other incentives that kind of grew that grew that asset. So really back about maybe two years ago, the unstable community had a lot of you know time to reflect and that led to us actually rebuilding our products from the ground up. So we still have the MUSD kind of products way that was still out there, but we said let's actually try and build something that's.
More composable, more generalizable, more kind of useful for any kind of protocol to build with and we went on the product that was the most successful which was saved. So like how can we make that more generalizable and composable, so it can be for any asset and plug into any protocol. So I think our problems were kind of initially we were we we came to them with solutions we can actually solve this.
And that was from the product perspective?
0:06:23
Speaker #1
When we did that pivot we also had a few core contributors leave quite a few. So then he's not on the podcast, but Rafa who was leading the engineering team and and a few other core contributors and I had to rebuild the team so that was a challenge from the team. About two years ago we went at it pretty hard and successfully built a really great team. So those two challenges team and product we took on head first and I think we successfully, you know, approached those those problems, but about, you know at the turn of the year it became clear to the community that the project itself was just not financially sustainable. So the burn rate versus the amount of income the protocol was earning did not match up. We could potentially start dismantling some of the value that we've created like the team and and cut costs a lot to give us a few more months. But the bottom line was how can we retain the value that we've built.
What we came to conclusion was it's either going to be some huge tokenomic changes which seemed to be kind of really complicated and but there wasn't really a clear route for that. Or we could just see if if there's a a bigger player in the market that could be interested in in acquiring some of those pieces of value and then putting it into a more sustainable project with a bigger balance sheet.
0:08:10
Speaker #1
Yeah, no, that's it's really cool of you guys to kind of recognize that and call it out for what it is because I think a lot of projects don't and are willing to run straight to the ground and earn a lot of money and probably draw extra salaries while they do it. So props off to you guys for doing that. It's really good, so on. I guess like when you have that, all right we this is the conclusion you not kind of have this problem of like a token. And I mean I've everyone who's listening to this one kind of know about Arctics and how we kind of took the token private and the complexities with that. But there's also you've kind of got two protocols now both with their own tokens. How do you guys even.
And navigate that process and think about the cash at hand, the talent, the IP, like who retains upside and what they're all these very nuanced questions like investor lockups, unvested tokens. There's a lot to kind of like consider there. So like, I guess, what was the, I guess, outcome and how do you guys derive that through discussions? And Erman or James, feel free to take that. Cool.
0:09:20
Speaker #3
I mean, I can talk about it maybe from the dHedge side.
0:09:24
Speaker #1
Sure.
0:09:25
Speaker #3
I mean it seems like, yeah, James did this part on the other forum kind of saying, hey, look, this is the situation as he's just explained it and and the the fact as you as you mentioned, Kerman have the kind of the foresight and maturity to kind of say, well, look, you know we've tried, we still have funds, there's something that we can kind of get back here is really great, so. From a so once we found out this was going to be like an open proposal and and other projects can kind of make offers and it was all done really well by the unstable team. We we we kind of thought the proposal should really go above and beyond that from a token holder point of view. From the MTA token holder point of view it should really go above and beyond. If it's right, shut down and get your funds back.
So for us, it wasn't really part of the equation. If you put yourselves in the shoes of a investor or token holder, you know, would you rather get stables back or would you rather get another token that's more volatile, less liquid. So for us from like an investor point of view, didn't really make sense. We should at least offer this, you know, this, this buyback that unstable's going to do anyway. But but in that scenario like then stable, the brand is, you know, it's dead.
There, there's no more funds, you don't pay, you can't pay the team. So what we wanted to do was was offer that buyback using the the liquid treasury from mStable. But we also wanted to offer enough upside because you know DH has a treasury, it's able to the the products complement well, the brand complements well. So we thought we could offer that minimum plus go above and beyond and continue building and and that was really the strategy that we went in and we had like no idea this hasn't been done before.
And as Rafael I think mentioned it's it was like a you know like the roadshow. So I don't know how many conversations James could tell you, you know how many different protocols is some serious, some not. And and the due diligence would have been really tough from the end stable team because obviously we're doing due diligence on end stable, but end stable is doing due diligence on us. It's like can we actually deliver what we're gonna, what we're gonna deliver what we say we're going to do. So yeah, I can leave it there for James.
0:11:39
Speaker #1
Yeah, I mean, maybe I can get some context on.
0:11:42
Speaker #2
On how the process was kind of played out, I think that the mStable team was really focused on making sure that this was a very open and fair and transparent process, so the community could kind of understand what was going on at all times. And anyone who was interested in acquiring mStable could put in a bid if they wanted to. Obviously, there was some guardrails around exactly how that bid needed to be put in. And there was a due diligence process and so on, but really anyone could have done it. And this is the kind of the first time we had, we had an advisor called Alistair which was really, really great that helped us manage it. But I'm pretty sure it was the first time that a kind of a acquisition to be done in this really open way. I think there have been other mergers in DEFY like for you know Rari for example, But usually it seems to me, I mean maybe come and you would know.
You know a bit about this, but it's usually seems like there's already a kind of a buyer interested that have cut that have approached and it's just kind of like a two way thing. But this was really yeah open to anyone.
0:12:54
Speaker #1
And that that, that was interesting because it could have kind of either led to nothing, but in the end it led to four bids coming for four bids and there are there are there are a way of a lot more interested. Projects beyond those four and then the MTA holders just voted on those on those, those four deals that came through into the forum or those four offers. And there's also a shutdown option as well. So it's fully into the hands of MTA holders, I personally.
Like abstain from voting, just because I think like as a founder, I didn't want to have any undue influences on on the direction, the future direction of the project. I wanted it to be, you know, fully community led.
0:13:42
Speaker #2
But yeah, it was, it was overwhelmingly dHedge. And that was great to have that kind of certainty over direction. And I think, yeah, the idea of having. The mStable brand stay alive, having upside in the token but also having the option to rage quit. Is was was was attracted to people.
0:14:01
Speaker #1
Completely. It reminds me a bit of parallels with like when we went private of like if you want to rage quit, here's some money, but if you want to stay on that journey, go along. And I think like any teams that are thinking about any sort of like controversial decision when it comes to the token, that seems to be like a model that I think more should model off, I think forcing either to keep the upside or to cash out. Just makes it really hard to like achieve like a balance of fairness across all parties. So cool to kind of like see that is like a recurring theme. I guess this is a follow on question, like what does due diligence look like, right, Like when you're acquiring a traditional company, there's some very.
Not easing metrics, but there's a established process and crypto half the challenges, knowing what lies beneath, beneath the covers and it can be very complicated. So how did you navigate that process in terms of evaluating the other teams? And what factors do you feel like other teams were evaluating you guys on when it came to due diligence? Yeah, I mean, if I can, I can kick off and then I'm going to be interesting to hear how you kind of did your DD on mStable.
0:15:10
Speaker #2
The great thing about crypto, obviously is that a lot of the information is on chains. So we could understand what the their protocol was doing by just looking on chain. We could understand their treasury by just asking for addresses and so a lot of that kind of just basic information you could just discover quite quite readily on chain.
0:15:35
Speaker #1
I think the more pressing fact was kind of especially around team. So like there's obviously you can quite quickly see if they have a treasury, you can quite quickly see if how much, how how much usage their protocols getting. You can quite quickly talk about you know their products and and we can have a like the team and community can have a discussion about whether their products have any traction but.
0:16:03
Speaker #1
The thing that we found was interesting is just that. Classic thing with any kind of acquisition, do the teams fit? Is there a culture fit and that actually really separated the wheat from the chaff, from a lot of the projects that put in proposals. So yeah, it was just it was really interesting just to see how our teams work together and and and see if there was a match there. Because I think like any acquisition you just need to have that trust and that working relationship to actually get things through and and make make sure things are smooth.
0:16:46
Speaker #3
Yeah, I think, yeah, I think you've changed as an alert with the with the unchanged step. So yeah, a lot of it is available on chain and you can still have conversations with people and just to see that out of the story matches up and yeah. mStable was was very, very transparent. I it's it's interesting this point on on the team fit one thing that kind of we the the problem from our side was we couldn't take on the whole mSstable team. So we have to kind of decide you know who we needed and who might be a good team fit for us. One thing that I kind of underestimated is maybe this process of the acquisition or maybe from the first realization that hey OK we didn't have product market fits we need a Plan B.
Some uncertainty kind of creeping in with the team and then more uncertainty with OK, we shut down, OK, maybe we we can do an acquisition and still wasn't even clear for us until the end until the final vote happened like who's going to acquire it. So he's supposed to make these like decisions and tell people you know who want on the team and but still you you aren't sure where you kind of where you kind of sit.
So I think that is uncertainty would have been really tough for the for the mSstable team and and I think basically the whole team was looking for other opportunities as well as this was kind of going on and that's kind of something I was hoping we could really retain. Yeah a few more kind of team members but that didn't really really play out the same way. I mean we we're still we're still going ahead with the mStable vision and and we're hiring and we'll start ramping that up as well. But yeah that was kind of one thing.
Just that uncertainty of going through this process, I think it it must take a take a toll on you, right?
0:18:31
Speaker #1
Yeah. Is there. And like, how would you maybe you like reconnected the process if you could change it looking back, because obviously it's hard. You have the proposal set in stone and then you have token holders vote on which one they want and everything kind of has to be ready for whichever one they choose. But yeah, maybe there isn't a way that you could have been proven. That's just the way it is, but. I'm sure you guys would have had more time to think about what could have been improved through the process. Yeah, I mean there was it's it's kind of balancing giving certainty but.
0:19:04
Speaker #2
Also just giving time for people to evaluate options and I think like we tried to give enough time to team to understand what the opportunities were that we're gonna come out come about. So that obviously required a bit of time for these for the bids to come in and but also like we needed to retain the team to keep that value, right, We do If the team just left then a lot of the attractiveness of and stable might might leave too. So it was really balancing like let's not burn too much of the treasury which is reducing the value of the project by keeping on the team but we also need to keep the team in order to.
In order to I have an attractive project to to sell. So there was a bit of kind of toing and throwing there. I think we did it probably as quickly as we could and like I appreciate D hedge and the other projects for putting in there.
Their proposals in like by the due date there was a very strict kind of timeline and all those kind of things, but our governance coordinator was, was was like on people's bots to make sure that happened, yeah.
0:20:24
Speaker #3
That was an interesting game as well because not everyone put their proposal in on time, right? And and then the other parties would sort of want to see what else was coming in, I'm guessing and would try and push it till the end. So there's definitely some game there.
0:20:38
Speaker #1
That's fascinating. It sounds like a decentralized investment banking. Yeah, yeah, I mean it would be really interesting in the Alistair guys on as well. They're these these guys who?
0:20:48
Speaker #2
Advise the deal Who are these? They're like formerly bankers out of New York. And they've they've built a web three advisory firm and. Yeah, I think they they that they kind of come from an MA background. So I think like their whole pieces of the firm is that this is going to happen a lot more often as D5 consolidates.
0:21:09
Speaker #1
Beautiful. Well, that's actually leads into my next question, which is like how would you advise I guess like any future companies that are thinking of like going through a process either is being acquired or acquiring another protocol because. We still, at least in my mind roughly got like another year, year and a half bear market up ahead and I don't think this is going to be the loss of kind of the mergers to happen. So maybe Irving, if you want to kick us off like any advice you'd have to companies that are in the position to maybe acquire a project and when not to do it and when to do it effectively.
0:21:43
Speaker #3
I think like in times like these, these are like where the opportunities are. And I think just should just keep an eye out and you know if, yeah, like if if you have a, if you're helping, if you're contributing to a project and it's struggling not making revenue And you know, I don't know how many, you know how many projects are doing the calculations like what's what's the lifestyle customer lifes on value in the CAC and probably probably not many, I don't know.
It feels a bit like, hey, let's just throw tokens at it and we got product market fit until obviously that token devalues. So I think just I think we should just have more of it and have more of a conversation about it and it'd be nice to have some standards around it as well. I I can imagine a nonchain marketplace at least for the Unchained transitions, you know, because you have a marketplace for JAWS, I think that might be critical.
So yeah, I just think, yeah, keeping and keeping an eye out and which is rather than as you mentioned, running projects to 0.
0:22:47
Speaker #1
Yeah, I mean, I I would just say like.
0:22:49
Speaker #2
Obviously the laws of physics, so to speak, apply to D5 projects as much as they do to every other organization out there and like I think. You have to be honest with yourself, with the, with the, with the team, with the community about how things are going and whether there's a better option out there, like it's not a failure or anything to to get merged within a bigger project. It's the it's the opposite. It actually gives another life to to the community and to the token holders and to the products. Like, I think the worst thing is to.
Burn cash, I think it's some people call it a slow rug of just kind of paying paying staff and there's actually like no, it seems like a very small chance of things being actually successful. Like that doesn't seem like a very honest way of of doing things. So I think like I would definitely recommend projects to consider you know more creative solutions to to their state unless they've kind of already you know.
They have a lot of unless they have a lot of faith in their product and they they can see a way of of growth and sustainability out there. I think, yeah, I'm, I think the M stable community are really, really happy to to be part of a project like D Hedge where we have similar visions and and there's just kind of literally just the the project itself now has a much, much larger runway. So there's much greater opportunity for the success I think.
So yeah, I I I would I would definitely recommend looking into this road. Doesn't probably wouldn't work work for everyone. Maybe just a simple shutdown will also be good for some projects, but given how much people raise maybe that that that won't happen quickly. But yeah, I think that's just some top line thoughts.
0:24:44
Speaker #1
Completely it's. Yeah, it's really hard coming kind of coming to that realization I've had to doing the possible like actually this isn't working. What's this kind of like hard call to make and I think the number of people have kind of done what.
I'd say the three of us have done like in a similar vein rather like restructuring a token in a significant way is probably less than 20 on the planet. So we're definitely amongst a very special cohort of people. And yeah, like I'd love if there's any, like additional thoughts. You have Erman and then James on the whole thing, like any personal reflections or kind of things you're excited about the future just to kind of close things out.
0:25:27
Speaker #2
Thought it was awesome to be to be part of that process, to kind of see how how it's played out. And it was the whole stable team was, it was a pleasure to deal with through the entire process. So yeah, I I think it was just great to be part of it. Obviously to come out, come out on top and just to be able to continue the unstable vision. And yeah, we're just gonna keep going.
0:25:52
Speaker #1
Yeah.
0:25:53
Speaker #2
Absolutely. Say the same thing. Like I'm really, really impressed with the dHedge team and I think like there's a there's a really bright future there. So I'm very thrilled about how smooth the process has been for everyone involved. I think like these things can I assume cannot be smooth. So I'm very grateful that it was.
0:26:17
Speaker #1
Yeah.
0:26:17
Speaker #2
I'm excited. Personally, I'm taking some time off crypto so I'm going to be looking at like off off the screen and into the into the wider world for for at least a few months. But no, I'm excited as ever for for DeFi. You know, there was a bit of a few moments where people got a bit excited about making really easy money, particularly with that kind of. Yield farming craze. But I think, you know the the fact is is that I'm disintermediating inefficient institutions with smart contracts is still as powerful as ever. And I think you know we're going to see a new round of D5 projects that do it in a much better way. You know I think 1 project that I'm that I looking closely at is more foe.
They're kind of rebuilding lending markets. So it's kind of like a the next evolution of compound and are they I think like those those kind of projects are really exciting. I think asset management as a as a vertical is, is hugely exciting and I think D Hedges got their fingers in many different pies on that one. So obviously looking at D hedge as well and and also Archex, I mean I'm would love to kind of hear a little bit about what you guys are up to, but maybe we can do that off call however you'd like.
0:27:38
Speaker #1
Completely. Completely. Yeah, I know. Thanks so much guys. Is a really good chat. And if anyone's thinking about doing major restructurings to their protocol or token, feel free to reach out to the three of us because I'm sure we could tell you a thing or two. Thanks a lot guys. We'll call it here.
Executing a DeFi Merger (mStable & dHedge)