Why a merge?
I must admit I had my issues regarding the merge of the two DAOs. I was expecting as stated by the devs two different DAOs, but, this is an iterative process. So I did some digging on why organizations merge in the academic literature. Here are the main reasons according to Vazirani (2015):
- Inefficient Management
- Agency Problems
- Tax Considerations
- Market Expansion
- Purchase of Assets below their replacement costs
In the case of core and delta, seems to be mainly for (2) synergy and (4) agency problems. Synergy as the scope is to become a set of products based on locked liquidity, so expanding from loans (core) to futures (delta). Agency problem may raise as core management team (DAO) is different than delta one; in time, this may lead to challenging problems. Furthermore, the dev teams may be even be different.
Summing up, a merge is the best approach to minimize risks.
What is the status of the Core and Delta?
Core has a MVP of lending and fee on transfer. There were iteration of products with the arbitrage product that the different LP1, LP2 and LP3 were used.
In contrast, delta has no MVP yet as the main dev time was allocated to finalize the lending side of Core.
So, core is easier to value, while delta is more difficult as it involves a degree of speculation to value it.
How to value the different DAOs?
I have did some digging in the academic literature. There are five basic formulas according to Smucker (2000):
- Book Value → This would be the liquidity in the DAOs
- Straight Capitalization → This is not suitable bc it is designed for ones that does not require capital. Core and delta value proposition is locked liquidity (i.e., capital)
- Modified Capitalization, Capitalize Excess Earnings → it cannot be applied as it asumes the devs to be on the project forever
- Modified Capitalization, Life of Goodwill → Same as prior but it assume the devs involved with a limited time
- Discounted Future Earnings → You project a growth to value it based on speculation
In the case of core and delta, we can:
- Book of value. Use the locked liquidity of core and delta to distribute the coreDAO.
- Modified Capitalization, Life of Goodwill. Use the stable issuance to estimate the value of delta, while considering the devs to be involved in the delta’s project for a year
- Discounted Future Earnings. Include the expected growth of both products.
Finally, I see a fourth option which is to agree on the merge based on the revenue that options generates compared to loans
What are my thoughts?
I think we should merge as soon as possible to minimize frictions. I see that merging based on liquidity provided is unfair for the delta rlp holders as delta has no MVP product yet. I would use the estimation from the devs in the apr for the merge valuations as they are the ones with the most knowledge.
What about the dev allocation to coreDAO?
The rate of conversion should be the same as the ones of delta rlp based on the mint price at the time of LSW. The main reason is the funds were raised during LSW and they should have the same terms as delta rlp
- Smucker, D. K. (2020). Common Business Valuation Methods and Related Topics. Journal of Financial Service Professionals , 74 (5).
- Vazirani, N. (2015). A Literature Review on Mergers and Acquisitions Waves and Theories. SIES Journal of Management , 11 (1).
I’m hold coreDAO, core, and rlp in a similar ratio