All of the major events at DeFi this week have been linked to Yearn.finance, Harvest Improvement Protocol. In the final part I covered the first part, Pickle Finance.
Since then, we’ve seen integration with Cream Finance, which is a similar lending protocol to Compound; Cover Protocol, an insurance company that recently paid users money to hack Pickle; Acropolis, another protocol that mainly deals with improving yield; Most importantly, sushi swap, a decentralized exchange spawned by the Uniswap parasite.
The Yearn ecosystem now includes all the building blocks for DeFi (returns, loans, and asset swaps), especially thanks to the integration of Cream and SushiSwap.
But I am sure many have questions about what is going on here. How can decentralized protocol mergers happen? Who will solve it? Are these real mergers?
Compared with mergers
I think the key to understanding these events is knowing what happens during conventional consolidation.
In practical terms, the two companies merged for obvious reasons. In horizontal consolidation, it is usually about expanding the total market share and promoting development. Think of a Fiat-Chrysler merger with Peugeot-Citroen or any other auto company merger – their cars will remain the same after the merger.
Instead, vertical merger brings different companies together into a vertically integrated group – like Disney, which joined ABC in the 1990s. Their products are usually different, but they can be part of the same supply chain and thus have the benefits of incorporating them into the same company.
Among Yearn’s five mergers, we saw both types. Acropolis and Pickle Finance are similar to auto mergers. Absorbed protocols will build their “hardware” (return strategies) on the Yearn platform, making them functionally as they are. At best, there should be some differences in flair – similar to the way Audi targets a different segment, even though it usually has the same Volkswagen platform. Perhaps Bickle’s strategies face greater risks than moves?
Vertical fusion is what we’ve seen with Cover, Cream and SushiSwap. Here we can see a fairly clear synergy between Yearn and each of these protocols. Annual return strategies will now use Careem loans to open existing positions, and if they need to exchange any tokens, they use Sushi Swap. Finally, Cover will provide insurance for these products to whoever wants them.
The point, however, is that these product integrations are not sufficient to represent a single merger. For example, Renault and Nissan have shared technology throughout the 21st century without formal merger.
A de facto merger requires either the creation of a new integrated company in which the existing shareholders congregate, or at least one company “buy-back” all the remaining shares and replace them with another of its own. Only SushiSwap’s integration comes a little closer to this definition.
The Economic Aspect of Incorporating Yearn
In the case of SushiSwap, the collaboration will involve exchanging a portion of each other’s treasures in exchange for partner codes. The two protocols are still very independent, and you’ll notice that “replacing part of the cabinet” does not mean “replacing all SUSHI with YFI or vice versa.”
The lack of real financial terms is perhaps the biggest reason why none of these mergers could be agreed upon, except for SushiSwap. You don’t actually need to use any DeFi concept to explain what happened here. These are more than true mergers, they are just close partnerships – in the corporate world, partnerships are usually not driven by shareholders.
I’m actually a little curious to know why these “consolidations” are needed at all. Annual Strategies take advantage of other platforms like Maker and Curve completely without consolidation – that’s the unauthorized nature of DeFi. Although in the case of the creators, Hearn needed to request access to the creator’s oracle.
Perhaps the most important is what comes next: Bring development teams together to create new products. This can happen again in terms of partnerships.
I think the word “integrate” sounds more cute than “partnership,” although the title “DeFi Protocol Works With Another DeFi Protocol” is interesting in my opinion. But this would also be strange – how does a decentralized protocol interact with another? Well, it’s a matter of development teams’ decisions to do that. This should be surprising. Every decentralized team is still a list of first and last names, just like employees of a traditional corporation.
I would argue that the question of whether the “decentralized” development team should make this decision is a philosophical debate.