The biggest events at DeFi this week were related to Yearn.finance, the protocol for optimizing high-yield farming. I covered the first Pickle Finance in my last installment.
Since then, we’ve seen integrations with Cream Finance, a loan protocol similar to Compound; Cover Protocol, an insurer that recently paid users for the pickle hack; Acropolis, another protocol primarily concerned with yield optimization; and as the most significant of all SushiSwap, the decentralized exchange that was born as a parasite of Uniswap.
The Yearn ecosystem now includes all major DeFi components (returns, loans, asset swaps), especially thanks to the integration of Cream and SushiSwap.
But I am sure that many will have questions about what is happening here. How can mergers between decentralized protocols occur? Who will choose them? Are They Real Mergers?
Comparison with a corporate merger
I think the key to understanding these events is to observe what happens during a traditional corporate merger.
From a practical point of view, two companies are merging for pretty obvious reasons. Horizontal mergers are usually about adding overall market share and consolidating development. Think of the Fiat-Chrysler merger with the Peugeot-Citroen group, or any other car company merger: your cars will be practically the same after the merger.
Instead, A vertical merger brings different companies together in a vertically integrated cluster. For example, Disney joined ABC in the 1990s. Their products are often different, but they can still be part of the same supply chain, so they benefit from being grouped as part of a single company.
We saw both types among the five Yearn mergers. Acropolis and Pickle Finance are very similar to car company mergers. The absorbed logs build their “cars” (revenue strategies) on the Yearn platform and make them functionally the same. At best, there should be some differences in taste, much like an Audi targeting a different niche, despite generally having the same platform as a Volkswagen. Maybe pickle’s strategies are riskier than Yearn’s?
We saw vertical fusion at Cover, Cream and SushiSwap. Here we see pretty clear synergies between Yearn and each of these protocols. Yearn’s return strategies now use Cream loans to take leveraged positions and when they need to trade some tokens they use SushiSwap. Finally, Cover offers insurance for these products to those who wish.
The point, however, is that these product integrations are not enough to constitute a merger on their own. For example, Renault and Nissan shared technology without officially merging during the 21st century.
A true merger requires the creation of a new integrated company that brings together existing shareholders, or at least one company “buys” all of the other’s outstanding shares by exchanging them for its own.. Only the SushiSwap integration comes a little closer to this definition.
The Financial Aspect of Yearns “Mergers”
In the case of SushiSwap, The collaboration involves exchanging part of everyone’s treasures for the partner’s tokens. The two protocols are still very independent and you will find that “replacing part of the treasuries” does not “replace all SUSHI with YFI or vice versa”.
- The merger of Yearn.finance with SushiSwap will be the most complete to date
The lack of actual financial ties may be the main reason none of these mergers have been put to the vote, with the exception of SushiSwap. You don’t have to include DeFi terms to explain what happened here. More than true mergers, these are simply close partnerships: in the corporate world, partnerships are generally not decided by shareholders.
In fact, I’m a little curious why these “mergers” were necessary in the first place. Yearns strategies use other platforms like Maker and Curve perfectly without merging. This is what nature is all about without permission from DeFi. In Maker’s case, however, Yearn had to request access to Maker’s oracle.
Perhaps the most important point is the next: the meeting of development teams to develop new products. Again, this can also be done in a partnership.
I think “Fusion” sounds a lot better than “Association”, although a heading from “DeFi Protocol Associated With Another DeFi Protocol” is just as interesting in my opinion. But it would also be strange in some ways: how can one decentralized protocol be mapped to another? Well, it comes down to the decisions the development teams make to do this. That shouldn’t be too surprising. Each decentralized team is still a list of first and last names like the employees of a traditional company.
The question of whether a “decentralized” development team should make such decisions is a philosophical debate that I prefer to leave to the readers.