A Unicorn acquires a Genie
Another splashy DeFi acquisition...what does it mean for Uniswap, DeFi, and M&A?
On June 21st, Uniswap Labs announced that they had acquired Genie, an NFT marketplace aggregator. The NFT product will be integrated into the Uniswap web app, in conjunction with integrating NFTs into their developer APIs / widgets. The acquisition comes hot on the heels of OpenSea acquiring a Genie competitor, Gem, back in April.
The transaction value was not announced, but given Genie was founded in 2021, had raised very little funding, and had minimal user scale on their platform, the deal size was likely quite small. The consideration mix was probably mostly or all stock, perhaps with some of the consideration contingent upon operational milestones. In some ways, this deal can likely be viewed more as an acqui-hire than a full acquisition, though Uniswap will obviously leverage the acquired IP. Interestingly, in what appears to be the first of its kind in an M&A context, qualifying users of Genie prior to April 15th will receive a retroactive USDC airdrop. Likely a very cheap way for Uniswap to win some brownie points and reward Genie users.
A very important distinction to be made here is that the acquisition was done by Uniswap Labs (Labs), not the Uniswap Protocol (Protocol). It’s confusing enough to merit a quick cheat sheet:
Labs is the company that developed the Protocol, in addition to the Uniswap Interface (Interface). It is a centralized entity and is backed by venture capital investors. It is important to note that the Interface is still owned by Labs.
The Protocol is a suite of smart contracts that together create an AMM to facilitate the swapping of tokens.
The Interface is a web interface that allows for easy interaction with the Protocol. The Interface does not have a monopoly on Protocol access, and developers can build independent interfaces, although most volume on the Protocol is likely driven through the Interface that Labs developed and owns
The Protocol is governed by Uniswap Governance (Governance), which is enabled by the UNI token, and provides proposal + voting power proportionally to holders of UNI. The Governance function of the Protocol is for all intents and purposes a DAO
In September of 2020, Labs transitioned governance of the Protocol to the Governance system. The Governance system is managed by the token-holders of UNI, which is the ERC-20 token that was launched in conjunction with the governance transition. At Genesis, the investors and team in Labs received 40% of the token supply, with the remaining 60% going to the community (of which most still sits in the treasury)
A window into the strategy of Uniswap Labs
Labs is a for-profit entity. They spun off the Protocol in response to SushiSwap forking the code and attempting to drain the liquidity of the Protocol in the infamous “vampire attack”, all while organizing as a DAO (read: optics).
Labs has two main ways in which they can generate revenue from existing business operations: the Interface which they still own, and products that are complementary to the Interface. The UNI token-holders could vote to turn on the “fee switch” for the Protocol, but ultimately that revenue would accrue to the holders of the UNI token, not the Labs entity (although, given the Labs investors + team own 40% of the fully-diluted token-supply of UNI, they would still benefit, even if the revenue does not accrue to the Labs entity itself).
I don’t know what the revenue of Labs is today, but I imagine it is quite small / negligible (contrast that with the Protocol, which is averaging ~$5mm in fees per day,a similar scale to the entire Ethereum blockchain). The announcement is a big step towards releasing products that generate revenue for Labs. An NFT button will be displayed on the Interface, and the spreads generated from the NFT sales will accrue to the Labs entity. In addition to this, Labs likely views Genie and its team as its beachhead in the NFT market, and will plan to build / buy a host of additional products in this area (developer tools, commerce APIs, price feed, etc.). Outside of NFTs, there are other ways they could approach revenue generation such as charging a trading fee on the Interface. I’m sure that the Labs team has many more ideas than I have, but you get the point. They can do a lot to generate revenue without sending fees from the Protocol back to the Labs entity.
Labs sits in an incredible position in the DeFi system by virtue of their ownership of the Interface, and their close association / understanding of the Protocol. They will have no trouble raising additional capital in a bear market as VCs will flock to safety and dump more money into breakaway leaders. Labs has the ability to be patient and build products around the Uniswap ecosystem that improve the user experience which will attract and retain TVL. Monetizing won’t be challenging if the Uniswap ecosystem is thriving.
Competition intensifies in the NFT space
OpenSea is the 800-pound gorilla in the ERC-721 market. Coinbase and FTX haven’t done much with their NFT product, and smaller, pure-play NFT exchanges like Rarible and LooksRare have generated a lot of buzz, but haven’t made a material dent in OpenSea’s market share. Is Uniswap going to be the first company to challenge OpenSea’s market position? They are the most crypto / defi-native of the bunch, and as CEXs have struggled to take OpenSea market share, maybe a DEX will have better luck. If Uniswap does succeed, it won’t be because of the user base that Genie brings to the table (as of writing Gem had 45k users over the past 24 hours, compared to 150 for Genie).
How does OpenSea respond? Do they double down and protect their core NFT market? Or do they go on the offensive and go after Uniswap? What if they purchased a DEX aggregator in retaliation for Uniswap acquiring an NFT aggregator? It’s all speculation, but OpenSea has a beautiful thing going with its NFT exchange, and they will likely be focused on protecting that at all costs. Once sufficiently entrenched (if they aren’t already), they should start to think about offensive expansion. For now, their #1 focus should be to defend their position on the Ethereum blockchain and their #2 focus should be on expanding their market share on Solana
What does this mean for DeFi M&A?
Driven by a cohort of well-capitalized acquirers and intense competition amongst start-ups, M&A in DeFi has been accelerating and appears to have hit an inflection point in the past 6 months:
Uniswap Labs / Genie (June ‘22)
Nansen / Apeboard (May ‘22)
OpenSea / Gem (April ‘22)
ConsenSys / MyCrypto (February ‘22)
OpenSea / Dharma (January ‘22)
Tribe / Rari (December ‘21)
Kraken / Staked (December ‘21)
Coinbase / Bread (November ‘21)
xDai / Gnosis (November ‘21)
In a bull market, it’s easy for everyone to raise money. In a bear market, not so much. The clear leaders in DeFi will be able to raise additional capital, while start-ups that are less of a “sure thing” will struggle. That holds even more true for start-ups that have raised at excessively large valuations that they may never grow into. And as these start-ups look for homes, the leaders will be looking for ways to put their capital and highly-valued equity to use in an effort to cement their leading positions and accelerate their roadmap.
This is only the tip of the iceberg.