DeFi Protocols

DeFi protocols Rari Capital and Fei have been in talks to merge since mid-November 2021. Rari is known for its Fuse offering, which allows users to create their own permissionless money market pools. It has roughly $1.4 billion of total value supplied across Fuse as of writing. Rari has its own governance token, RGT. FEI is a decentralized algorithmic stablecoin that is backed by decentralized assets, largely ETH. It has approximately $1.2 billion of protocol-controlled value that backs the FEI stablecoin. The Fei protocol has a governance token, TRIBE.

Original Proposal

The original proposal called for the following:

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1. $1:$1 conversion of RGT to TRIBE, created from both the existing treasury and newly minted TRIBE
2. Fei creating proper contributor incentives as a mechanism to scale Fuse / yield aggregator
3. Fully pay back the Rari DAO’s debts from the ETH yield aggregator exploit (to REPT-b holders) in Fei (full compensation in Fei, at Dai price at hack time)
4. Keep independent communities (Fei, Rari) building together under a shared Tribe family

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Merger Synergies

Potential merger synergies could include broadening FEI’s use via Rari’s yield aggregator and Fuse offerings. Rari’s pools already accept FEI and TRIBE, so expanding these offerings could make sense. Rari could benefit in that its pools would be bootstrapped with initial liquidity via the FEI stablecoin. Moreover, FEI could generate a more resistant oracle source for Fuse pools on Uni v3 or Balancer v2 through Fei’s partnership for liquidity as a service with Ondo Finance. Furthermore, Rari users impacted by an exploit earlier in 2021 would be made whole from Fei, for a total of approximately $11 million.

Merger Plans

The proposals were simply that – it is now up to the Rari and Fei DAOs to draft terms both communities can vote on. Third parties have approached the protocols with potential merger plans. On November 29, 2021, crypto firm GFX Labs, which appears to be independent of the two protocols, released its detailed merger plan, a key component of which is that RGT would be exchanged for TRIBE at a rate of approximately 26.7 TRIBE per RGT, which solicited many responses from TRIBE and RGT holders.

What The Market Implies

As of writing, TRIBE is trading for approximately $1.10. At an exchange rate of 26.7 TRIBE per RGT, each RGT would be valued at approximately $29.37 in the GFX merger proposal (~$360mm valuation). Currently, RGT is trading at $23.60. This implies the market is discounting the possibility of the merger going through as proposed, and could pose an attractive arbitrage opportunity for traders who have conviction the merger will pass.

A Plot Twist

A plot twist came from GFX on December 3, 2021, when it withdrew its proposal, noting “everyone’s strategic visions may not be fully aligned”. It’s now unclear whether the Rari and Fei communities will continue forward with the original GFX proposal, or whether it will be significantly amended as discussions draw on. Regardless, with forum posts on both sides heated about whether the RGT and TRIBE tokens are being properly valued in the merger proposals, an opportunity could persist for event-driven investors.

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