With multiple ICOs and projects running out of funds (Sirin labs announced they have 6–12 months in run-way after raising $158M in 2017), innovative growth strategies are becoming more and more relevant. In the past few months, I have been exploring the concepts of M&A and growth hacking in crypto, focusing on how to apply “real world” growth strategies to crypto. The potential of crypto M&A is huge — EOS acquiring ETH Dapps, Monero absorbing Verge or Zcoin, etc. These ideas are theoretical, however, one project’s innovative thinking recently made it a reality. The first open source crypto “merger”.
Domocoin ($DOMO) was born out of a bachelor thesis of the project founder. The project aims to examine how blockchain communities interact internally and externally. The project is building a new social network that can be accessed using the DOMO token. While this is similar to other crypto projects, DOMO differentiates itself by providing the access just based on the users HOLDING Domocoins in their wallets. Users do not need to spend Domocoins to get access to the community. Different people may have different views about the potential success of the project, however, the goal of this article is to describe the innovative growth strategy that is being executed by the Domocoin core team — M&A.
To foster the growth of the DOMO community, the DOMO core team is reaching out to “dead” or “unsuccessful” crypto communities and offering them new and shiny Domocoins in exchange for “old” shitcoins. The idea is simple — a smaller part of something is better than a large part of nothing. Using common sense and trial and error, Domocoin initiated the first Open Source Crypto Merger with Heptacoin on October 12th 2018. Heptacoin ($HEPTA) is a no pre-mine PoW coin with multiple features (the actual features are not relevant for this article) and a ~1k member Discord community. Both Domocoin and Heptacoin are open source projects with no known legal entity attached to them. The goal was simple — acquire new Domocoin holders and users (the Domocoin team did not have any IP or tech-related goals).
To execute the “merger” the Dcomocoin team used community donations and Domocoins that went unclaimed after a successfully executed hard fork. The team followed a simple process that resembles a traditional equity markets M&A and includes the following key steps: Initiation, Exchange Rate Determination, and Notice.
Initiation — The Domocoin community identified Heptacoin as a “dead” project and reached out to the development team to gauge interest in a potential merger of the two communities.
Exchange Rate Determination — Upon indication of interest from Heptacoin token owners and an initial merger agreement, the Domocoin team decided on a fair exchange rate between DOMO and HEPTA. This process was fairly simple and was based on the number of Domocoins the core team decided to allocate to the the merger process.
Notice — Once the exchange rate was identified both the Domocoin and the Heptacoin admins and core team members announced the merger on all communication channels (BitcoinTalk, Discord).
Execution– the Domocoin team designed a simple and manual registration and token swap process. Heptacoin community members had to message the Domocoin core team with an email address and a wallet addresses of the old and new coin. The DOMO core team manually executed the exchange.
- 50% of the Heptacoin coin holders registered for the swap
- 75% of the registered users executed the swap
- Miners with large number of tokens, unsuccessfully tried to re-negotiate the exchange rate
- The Heptacoin blockchain is still alive, however there is only 1 live node (essentially the chain is dead)
- Out of the “converted” community members 50% are active within the DOMO community and 10% of them became active developers / contributes to the community
- Exchanges and Mining pools were not engaged during the exchange process
- No tech synergies were realized during the merger — e.g. Domocoin did not leverage any of the Heptacoin technology (pools, wallets, etc.) due to Domocoin having a PoS consensus algorithm be Heptacoin’s PoW.
- Heptacoins that were received by the Domocoin team were not burned and are still held by the core developer.
The Domocoin <> Heptacoin is the first recorded “merger” between open source crypto projects (if there were others please let me know) and proves that M&A is a viable growth hacking strategy for crypto projects. The following concepts should be further refined /considered for future mergers:
Fit — technological and community fit and compatibility between the merging coins should be evaluated to determine user retention rate and identify potential tech synergies. Additionally, the legal standing of both projects should be evaluated including: IP ownership, coin issuance process (mineable, ICO, Airdrop), governing body, potential indemnification rights, etc.
Initiation — approaching a project with a merger proposition could be complicated in an open market is challenging due to insider trading potential and should be done after through vetting of the community and the individuals involved.
Exchange Rate Determination — when working with larger projects the exchange rate could be driven by actual conversion rate as recorded on exchanges. However, additional factors such as active development, run-rate, community engagement, etc. should be considered. There is a potential of creating a declining coin exchange rate to motivate old token holders to participate in the merger process. Additionally, a “Point of no return” should be identified where after X amount of circulation is committed the merger is automatically executed (similar to Delaware corporate law where a majority of all outstanding shares on an as converted to common basis is required to approve a merger). Additionally, the potential of providing appraisal rights similar to what dissenting stockholders in Delaware are provided.
Notice — a reasonable notice period and process should be developed to ensure all holders of the acquired coin will have a chance to participate in the exchange. Additionally, identifying innovative ways to provide notice to as many token holders as possible.
Execution — the execution of the actual coin swap should be 100% automatic (the potential of using Komodo’s atomic swap process should be further explored). A Smart contract should be built receiving “old” coins and executing the swap and distribution if specific conditions are met.
The Domocoin Heptacoin was a tiny merger that lacked the potential complexity of a large scale one. However, it was able to provide us with a high-level framework for a merger and prove the concept. Domocoin was the first one to execute a “merger”, and will not be the last. This was the tip of the iceberg and the potential of crypto M&A is yet to be discovered. The complexity is going to increase with the projects that have large numbers of token holders and that were formed under a legal entity with corporate governance responsibilities to their equity holders, but so will the opportunity.
Special thanks goes to the founder of Domocoin for sharing the details around the transaction and to Evan Weiss, the General Counsel of Mineful for providing his opinion on some of the legal issues. The above article is the personal opinion of the author and does not represent legal or financial advice.