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Valuing Open Source: Principles for Acquiring DeFi Projects

As decentralized finance sees its first mergers and acquisitions, we’re left with a big question: How do you value an open-source project in a very new field like DeFi? 

The whole thing is fascinating, almost a contradiction! An analysis of the issues can help us sharpen a toolkit for understanding value creation and power in a world of open source, programmable blockchains and their assets. It can help us understand why things like “number of blockchain patents” are nonsense, and therefore suggest to financial incumbents a better way to be.

Lex Sokolin, a CoinDesk columnist, is global fintech co-head at ConsenSys, a Brooklyn, N.Y.-based blockchain software company. The following is adapted from his Fintech Blueprint newsletter.

The last time we had a corporate development discussion about tokens was in 2018. Messari CEO Ryan Selkis noted that a number of low quality projects sold their ICO tokens and received ether. So let’s say you sold 10 million of X, and got $10 million of USD equivalent denominated in ETH. As the market realized your project was worthless, let’s say X falls 90% in value. But the treasury still holds $10 million denominated in ETH. So the vulture fund strategy, copying a page from the book of 1980s traders and leveraged buy-out professionals, would be to buy up all the worthless X and somehow get control of the treasury. You pay $1 million USD equivalent for $10 million in treasury assets and profit.

This didn’t work for a few reasons. First, initial coin offering tokens did not have meaningful governance rights, or any enforcement mechanisms. If you buy them all, the only thing you hold is a bunch of digital pets. Yes, you could argue “reliance” to a court and extract damages or file injunctions. But it is highly unlikely that you would find suitable jurisdiction, and by the time you get it done, the house will have burned down. And second, ETH fell from over $1,000 to nearly $100. So the value of the honeypots became...

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