FIP-51: Fei <> Rari: Token Merge

Is $RGT overvalued? Probably. Is $TRIBE undervalued? Definitely!

Be aware of those who participated in the Genesis Group and fully supported this project by preswap $TRIBE at a price of $3.2 with their $ETH when it was under $2000 at that time. If FEI has a “debt” to pay, pay them first!

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The better approach which I’d like to support.

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GFX has been reading and talking with the Fei and Rari communities to develop a robust merger plan. The plan will lay out a merger timeline and describe each step in detail.

Fei and Rari DAOs’ will decide whether the merger happens, and if so, how. Our goal is to make sure the DAOs’ decisions are implemented accurately, informed, and seamlessly.

We hope to share our work with you shortly and look forward to receiving feedback from both communities.

-Getty Hill

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A lot of participants expressed their opposition to the merger, why are we still discussing this?

There are also a lot of users who expressed their endorsement to the merger, why can’t we allow the discussions to continue?

In fact, I’m surprised there has been no temperature check on this proposal - so here it is.

At this point in time based on known information, would you Support the Fei + Rari Merger?
  • Yes
  • No

0 voters

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Yes/No is voting is unfair. I you wish to pulse the community open this up to cover core focus. valuation, timing etc. You may realise that many who said yes are conditional.

@Captain ‘s comments at Discord reflects my sentiment:

Discord/ Governance has been a good platform where convergence has been achieved in the past.

So far following serious issues have been expressed above without a satisfactory resolution:

  1. TIMING of the deal appears to be wrong because:
    1.1 Tribe market price has not been established yet. It has been on the recovery since the Genesis flop where many real money investors like me lost money. We welcome the buyback, which had a positive impact prior to the rari merger distraction;
    1.2 USDT is shaky, so Tribe is likely to benefit from the safety escape. Perhaps we should delay the said merger after we ride on this surf.
    1.3 Rari’s asset value is questionable. Their valuation has gone up drastically on paper and has not yet been thoroughly tested in markets (based on revenue potential). Merger (if any) should wait for proper discussions/valuation models
  2. BUSINESS PLAN ISSUES;
    FEI has a focussed pure-play plan; we are still in an early phase and have some way to go before being listed in major exchanges etc. Rari merger is a distraction until we consolidate and increase circulation by at least 2-3 fold.

CBDC will impact our road map, but we are on strong ground as a pure defi.

Rari merger will make us more like a bank where credit risks etc sets the agenda. We are not ready for this yet. Neither we have clear buss plan.

3. TALENT MERGER RELATED ISSUES: There will be damaging defections and frustrations.

like @Dragonwarriors proposal as re-quoted below

“a partnership with exclusive rights for Fei to be the “guarded launch partner” of all Rari Capital products in return for paying off Rari Capital’s debts. This way Rari Capital retains it’s identity and autonomy, Fei gets a leg up on the competitive stablecoin market through exclusive access to Rari Capital’s suite of products, and both teams are incentivized to make sure each other is innovating and bringing the best possible products to market.”

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Since reading Joey’s and Jai’s proposal to merge Rari Capital and Fei Protocol, the team at GFX Labs has been excited by the historic idea of the first-ever merge of two DAOs. Over the last two weeks, GFX Labs has developed a comprehensive plan to facilitate the proposed merger. The attached document describes the terms of the merger in detail. The following is a brief overview.

Once the merger takes place, Rari Capital protocol governance will become fully integrated with Tribe and its TRIBE governance token. There are three major components of the merger.

  1. Adminship Transfer

    Rari Capital’s smart contracts will have their admin role transferred to Tribe.

  2. Exchange of RGT to TRIBE

    RGT will be exchanged for TRIBE at a rate of 26.705673 TRIBE per RGT. The rate is equal to the ratio of 7-day TWAPs (blocks 13653498 to 13697660) of RGT and TRIBE. Anyone who holds RGT will be able to swap their RGT for TRIBE by interacting with the PegExchanger contract.

  3. TRIBE Ragequit

    Anyone who held TRIBE at the Snapshot Block (13623378) will be able to exchange their TRIBE for FEI, up to the amount of TRIBE they held at the Snapshot Block. Each TRIBE will be exchanged for \frac{Protocol \,Equity}{619,605,725.325389147} FEI. Protocol Equity is defined as Protocol Controlled Value (PCV) net of User Circulating FEI, and both are evaluated at the block in which the exchange takes place. The denominator is the circulating supply of TRIBE at block 13697660, given by the maximum supply of TRIBE (1,000,000,000) net of the balance of TRIBE in the Tribe Treasury (291,025,163.276474189338679350) and the balance of TRIBE allocated for liquidity mining (89,369,111.39813669). Eligible TRIBE holders will be able to swap their TRIBE for FEI by interacting with the TribeRagequit contract.

The merger will be executed via two on-chain proposals - one to be voted on by Tribe governance and another by Rari governance. Once both proposals are executed, Tribe will assume administration of Rari Capital’s smart contracts, and users will be able to interact with PegExchanger and TribeRagequit.

The PegExchanger contract, TribeRagequit contract, and governance proposals are going to Code Arena for review this afternoon.

To develop the best possible proposal and communicate our decisions, we will be answering questions and taking feedback on the forum and the next community call. We look forward to hearing feedback from both Tribe and Rari communities.

The information here and on our document is for informational purposes only and in a draft state. We anticipate incorporating further community input.

PDF: https://gfxlabs.io/docs/draft_fei_rari_merger.pdf

We want to thank the Reverie and Llama teams for their help and feedback throughout this process.

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The rate is equal to the ratio of 7-day TWAPs. – I think we should clarify something about market price. What we called exchange rate include spot rate , slippage and real-time liquidity depth. It means it’s impossbile to swap at your rate. It’s just a OTC deal between two teams with negotiated rate. Everyone should know that.
image


CZ told everything

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Thanks GFX team for the solid work here. It will take some time for me to digest all of this; however, a couple of high level questions that popped into my mind as I read through the merger document:

  • Would you, and the teams involved, not want to outline a general section of reps and warranties? While I understand that the teams have good trust between each other (which is great!), it would be prudent to have some clear reps and warranties to avoid any issues later down the line. Yes, reps and warranties can be a bit awkward to negotiate, but rather get as much as possible on paper now to avoid a team fallout or some type of inter-community war later.
  • I can see a world where the ~$3m fee makes sense and I would want to give you, Llama, and others who worked on this (as well as several other components of the merger) what is fairly deserved; however, I have already seen a lot of chatter about the ~$3m fee. People are talking about this over what should really matter here: the functional details of the merger. Thus, would it be possible to clarify the origins of this number (perhaps some TradFi M&A advisory comps, a high level cost breakdown, etc.)? Clarity always helps and especially does in situations like these.
  • Concerning the exchange rate on the team / contributor side, what does this look like? Will vesting schedules remain the same? Will there be any accelerated vesting or ‘golden parachute’ equivalents because of the merger’s exchange of tokens?
  • Double clicking into the exchange rate, do we want to add some type of collar on the exchange rate? In TradFi, most stock-based deals are based on fixed or floating exchange ratios. Collars let both sides “hedge the risk of stock prices falling or rising by changing the exchange ratios based on the buyer’s price”.
  • Finally, what do you think of adding a termination / break-up fee? Or some indemnifications? Again, this stuff can be uncomfortable for the teams to go through, but if you want to avoid hairy problems down the line, it might be better to add in all this detail now. To be clear, I’m coming at this from the ‘better be safe than sorry’ angle - I think both teams are awesome and complement each other well.

That is what I have at the moment. Apologies if I asked something answered somewhere on Twitter or up in the replies section that I missed. I look forward to your response and thank you, as well as the respective teams and communities, for all the hard work!

I will be posting this on the Rari gov board as well given that I am a token holder of both

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can you clarify if the TRIBE tokens in Rari pool 8, or Uniswap v2 LP will be eligible for Ragequit buyback?

Thanks for the analysis and proposal, GFX team! I liked the idea of an exit for Tribe holders that do not agree with the deal.

Overall, I think the merge makes a ton of sense, I am just worried about the conditions, as this is a complex transaction.

TradFi x DeFi M&A

First, I would like to point out that this is different from the usual M & A in which we have the financial statements from both parties. Sadly, we don’t have a balance sheet analysis or an income statement. We do not have valuation calculations, just the intrinsic value that is not used to calculate the exchange price between TRIBE/RGT.

Price

We are using the TRIBE exchange price of $1.08, when the intrinsic value of TRIBE is $1.34. In other words, for selling TRIBE we are considering the $1.08 and for buying we are considering the $1.34

What is the rationale for using the TWAP for TRIBE and not its intrinsic value (protocol equity)?

I would prefer to analyze the merger with valuation multiples than market prices. We still do not have efficient markets in crypto and they are still very susceptible to speculation, especially in low liquidity tokens. In TradFi it is common to use P/EBITDA or P/SALES for M&A.

Considering the estimate of $7M fees per year from Rari Capital and that we are paying $ 363,357,203 (12,500,000 x 29.07), Rari Capital is being valued at 49x P/SALES, right?

Debt amount

About the Assumption of REPT-b Repayment Obligations, I would expect to see this value before voting on the merger proposal.

Scenario Analysis

The idea is that Tribe will use all the DAO Treasury to buy Rari, will it be enough or do we need to mint TRIBE?

If the ragequit we are going to reduce the collateralization ratio of Fei Protocol. What happens if ETH “crashes” (-30%) and 75% of Tribe Holder use Ragequit, can we mint TRIBE as expected by the Fei v2 design of buyback and backstop?

“The creation of new TRIBE tokens outside of a pre-determined schedule and declared as an appendix to this proposal.” p.8 → Is the TRIBE for backstop considered as a pre-determined schedule? it was not clear to me.

Anyway, we should wait at least until 15th December to have TRIBE backstop implemented.

From Fei v2 design, how would work the “TRIBE Mint Cap: Capped TRIBE annual inflation” considering the merger? How the DAO will have the resources to fund its operational expenses in a sustainable way?

GFX Labs Compensation

What is the benchmark for the GFX Labs compensation? It does not seem that a comparison with TradFi M&A is applicable as the activities are very different. It would be good to provide some benchmark with comparable activities.

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Question.

Why can’t RARI pay back their hack debts prior to any merge? If they have the funds, let them handle it.

Hi all, this is Dan Elitzer, founder of Nascent. Nascent was the lead investor of Fei Labs’ pre-seed round and we are also a significant holder of RGT, most of which we farmed and held because I had met Jai and Jack and thought that the project was immensely undervalued at that time ($<10M FDV) given the strength of the team. There are likely only one or two other people or entities outside of the projects’ core contributors with as much to gain (or lose) if this merger goes through.

Despite being close to both teams, I only learned about the potential of this proposal being made a few days before it was made public and was informed in the capacity of “we’re planning to do this; if you have strong objections, please let us know ASAP.” (Note: Nascent has not traded RGT or TRIBE since I learned of the possibility of this proposal and I have never personally held either asset outside of Nascent.) My initial response was extremely enthusiastic and after further consideration, I strongly support moving forward. Even before learning of this proposal, these were the two protocols/teams I’ve been most excited about over the past few months because of how they are executing and how much potential I see ahead of them. They are both highly collaborative and I believe this merger would supercharge both their creativity and their ability to execute on extremely ambitious roadmaps.

What Rari gets

The near- and medium-term roadmap for Rari is just nuts, with v2 Vaults, improvements to Fuse, Nova, Tanks, etc. In my view, growth is hindered by lack of a meaningful treasury and the community’s reluctance to commit to meaningful liquidity mining rewards that could supercharge growth. Access to Fei’s massive TRIBE treasury, plus the ability to utilize PCV to help bootstrap new product offerings, immediately makes it significantly easier to get the flywheel going.

The main risk to Rari is that merging with Fei harms the credible neutrality of Fuse and other protocols, causing other stablecoin projects to be less likely to continue to partner closely. That said, there has been much more collaboration among the new breed of stablecoins than I expected, so it’s not as big of a concern for me at this point as it would seem at first glance.

What Fei gets

As mentioned, the potential of Rari’s protocols is absolutely massive and tight integration is likely to be helpful in growing natural demand for FEI across the DeFi ecosystem. For me though, this is largely about the strength and creativity of the Rari Capital core contributors - they bring a technical depth and level of energy that is hard to match. Bringing that into close collaboration with the Fei Labs team and broader Tribe community is something that I expect will unleash even more rapid and aggressive development of Fei.

The biggest risk I see to Fei is that this merger could lead to a lack of focus. The opportunity in front of Fei, to build the dominant DeFi-native stablecoin, is absolutely massive on its own. While I do think the Rari suite of products will be helpful in achieving this potential, it will be crucial to avoid shiny-object syndrome.

Valuation

While the exact mechanism for the exchange rate is worth discussion, I hope the communities don’t get too bogged down with this and end up missing the forest for the trees. If you look in both forums, you’ll see quite a few posts indicating that each community feels their own token is currently undervalued and the other is overvalued. That makes sense: everyone is much more likely to hold a significant amount of a token they believe is undervalued and believe in a framework for valuation that puts that project in a very positive light.

The core challenge here is that most Fei community members view TRIBE as a value play (it currently trades either slightly above or slightly below book value, depending on how you calculate it), whereas most Rari community members view RGT as a growth play. I happen to be interested in the growth potential for both, but that doesn’t seem to be the sentiment I’ve seen reflected in forum posts thus far. Given this disconnect in views of valuation, it makes sense that there would need to be further refinement to the exact price/mechanisms to get everyone comfortable with the merger.

The proposal by @GFXlabs seems like it is getting to a better place on the valuation front, and I especially like the addition of the ragequit mechanism. (The 3M TRIBE compensation feels aggressive for just the work put towards the merger, but I’m a big fan of Getty/GFX and their work in other communities, so I’d be comfortable with it if accompanied by a 2-3 year vest and commitment to be an active ongoing governance participant.) Good points are made by @CometShock https://twitter.com/CometShock/status/1465467269958537223 about a reasonable adjustment to the timing on the 7-day TWAP.

Calling back to an earlier point: “There are likely only one or two other people or entities outside of the projects’ core contributors with as much to gain (or lose) [as Nascent] if this merger goes through.” The core contributors to Fei Protocol and Rari Capital have the most at stake here, both in both financial terms and in terms of what it will mean for how their time and energy is spent in the coming years. My understanding is that Joey and Jai confirmed the strong support of their teams before publicly making this proposal. To me, this is the strongest case for tokenholders to support this merger: the people with the most at stake and who spend the most time contributing to these projects strongly believe that this is the right thing to do. If you don’t trust the judgement of each team that has independently concluded this is the path that is most likely to lead to the greatest long-term success for their projects, I’m not sure why you’re holding these tokens in the first place. That’s not to say that we shouldn’t ask critical questions, refine the exact terms, try to get as many members of each community excited (or at least comfortable) with the proposal; I’m just suggesting that in the absence of strong rationale for why each project is better off in an independent state, we should default going along with the desire to merge expressed by the founders and core contributors of each project.

Cross posting to Rari forum as well

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Hi this is Jason (@mrjasonchoi), early investor in Fei and early holder of RGT.

Thankful for the work that GFX Labs has done, but the ~$3.5M compensation for assisting with the merger these few weeks strikes me as very aggressive and I believe more than a few share my sentiment judging from initial responses.

Even for a staunch proponent of generous governance mining, objectively this is a high amount. This will be one of the largest capital outlays from Fei since inception, and as such should be evaluated with rigor.

For a startup that recently raised $2.5M seed (https://twitter.com/jobsincrypto/status/1464421218740846600?s=20), I’d like to know exactly how the $3.5M is used.

I propose having either

(1) a revision of the amount paid, perhaps opening the process up for a bid from multiple parties

(2) a tiered released based on milestones around long term commitment, with multi-year long vesting in place to align long term interests. Unlocks are dependent on quantifiable KPIs so community can hold GFX accountable

Curious to hear your thoughts.

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TBH, I appreciate the discomfort created by the aggressiveness of this request. We need to normalize paying top dollar for top talent, and @GFXlabs has clearly established itself as one of the most valuable governance participants across multiple Tier 1 DeFi communities.

That said, I’m very much in favor of (2) here. I would be uncomfortable with Fei paying this much for work on the merger alone, but think it would be justifiable for meaningful ongoing engagement from GFX over the next few years.

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Appreciate the insight @delitzer , wasn’t aware of them at all / their past track record myself, is there any where i can find a history of their participation across these communities? Would like to see the impact that they have had there to see how justified this compensation is

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GFX founder, Getty Hill, is one of the earliest and most active members of the Compound community. He has also recently led some high-impact proposals for Uniswap, including adding the 1bps fee tier and upgrading to governor bravo. He may be involved in other communities too, but those are the ones I’m aware of.

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Overall, I’m excited for the merge, and the document shared by GFX is full of details, it is amazing to move the conversation forward. But I would like to see some changes to it / more details on some points - these are listed below.

II. Definitions
W. I don’t think we should use a raw TWAP as the sole source of exchange rate. Dan Elitzer explains nicely what is the problem here :

I see TRIBE as a value and growth play, too, and using a TWAP is not appropriate. This metric is not comparable between TRIBE and RGT, because both protocols have very different approaches towards liquidity. As an example, if a large holder would like to enter/exit a position in both tokens, the price impacts would be very different (and I took a pair that is advantageous to RGT) :

This shows that RGT token price is more subject to hype/fud and not being valued properly. On the other side, TRIBE has a liquidity that is toovery deep, it is not even valued at the intrinsic value of its assets, let alone growth potential. As an example, we could stop incentives on the TRIBE/FEI pool, vote to remove IDO liquidity, and have the protocol buybacks pump the TRIBE token like crazy. But we’re not doing that, because we value liquidity. The two protocols have a very different approach towards liquidity, and that makes TWAPs not comparable.

If “intrinsic value” using 619M circulating TRIBE (~1.35$ per TRIBE) is how TRIBE is valued for ragequit, why not also use this metric for exchange rate ? It would change from 26.7 TRIBE/RGT to ~21.5 TRIBE/RGT. Also, discounting REPT-b holders indemnification (20M$ / 12.5M RGT = 1.6$/RGT), and a small discount for liquidity depth, I think we should propose 15 TRIBE/RGT in the OTC deal. It is already generous, considering what traditional ways of valuating RGT would give :

Assuming the current deployments and yields, we can estimate that Fei Protocol can generate around 40M$ of profits yearly, and we are not even optimizing for yield yet :

  • 220M$ in stablecoins @ 7% APR
  • 46M$ of ETH in Tokemak @ 8% APR
  • 113M$ of ETH staked on Lido @ 5% APR
  • 500M$ of ETH in Aave/Compound @ 1% APR
  • 150M$ of ETH in Uniswap-v2 FEI-ETH pool @ 7% APR
  • ~500k FEI of interest earned in the various Fuse pools over the last ~4 months

This is equivalent to ~0.065$ of yearly revenue per TRIBE, and at the proposed 1.08$ TRIBE price, that is a valuation at ~16x P/SALES, accounting only for the revenues and not even the assets held by the protocol. If we used the same 49x P/SALES as RGT, that would be 3.185$ per TRIBE, and then we’d need to add the 1.35$ of intrinsic value (protocol assets), for a total of 4.535$/TRIBE, or a change rate of 6.4 TRIBE/RGT.

The Fei Protocol revenue is around 6x more than Fuse, but it would be interesting to see revenues from other Rari products, to see how things add up. I think this points to another important point : we need more information / technical reports on both protocols.

That being said, I don’t think we should make an offer too far away from the spot price, as it would not be fair to RGT holder, and we still want the merge to happen. A change rate of 15 would give RGT holders 15*1.35=20.25$ of intrinsic value per RGT, and they would get access to liquidity mining, PCV to bootstrap new products, a token with larger liquidity, a wider tokenholder base, no debt, and still be exposed to Rari’s growth.

VI. Distribution of TRIBE to RGT holders
How do we handle the fact that Rari contributors have vesting RGT tokens, and would need to switch to a TRIBE vesting schedule ? I think more discussions on this topic should be included in this section, because it is an integral part of the merge proposal, and should be part of the snapshot.

VIII. Ragequit
C/D. I think users should stake (irrevocably) in the Ragequit contract, and only one ragequit transaction reading the CR oracle should take place at the end of the 3 days period. The currently proposed mechanism will create a race to exit first, and as more people ragequit, the FEI offered per TRIBE will drop (because circulating FEI will increase, so PCV equity will drop). It would be more fair to allow everyone to commit to the ragequit, and have everyone ragequit together (looking forward to the memes here), like what we have done in the Genesis event and commitment from FEI to TRIBE. The current plan creates unnecessary MEV & arbitrage opportunities that in the end may be detrimental to the protocol. It’s also not very fair to people that don’t know how to operate a bot.

X. Assumption of REPT-b Repayment Obligations
Can we get more details on this ? What is the total amount expected in FEI (I think 20M, but I’m not sure), what happened, how were the token mintable, who are the current owners, were the tokens acquirable at a discount after the hack ? If the Rari community takes a discount on RGT conversion for it, they bear the price of hack repayment, so I don’t care, but if protocol equity post-merger is used to compensate this hack, I would like to get more details.

XI. GFX Labs Payment
In section “IX. Costs of Implementation”, it is said that both protocols are responsible for due diligence, deployment, etc. But if the compensation is going to be in the order of 3.5M$, I would have higher expectations regarding what is provided by GFX Labs. For instance, I expect most code for the merge to be written by your teams, and that you take care of the additional informations required to snapshot the merge.

Regarding the amount, it is very large for a ~month of work. If the goal is to foster a long term relationship between the Tribe and GFX Labs, I think that PDF you created was a good interview challenge & you’re hired, but now you guys should get the full amount on a back-weighted long duration timelock (e.g. quadratic 4 years), with clawback possible by DAO vote, like contributors and core team members get. You have proven that you can be valuable DAO contributors, so it will be a pleasure to get you on board, but if we want to keep you motivated & active over the long run, the timelock is kind of mandatory, I don’t see why we would make an exception, even the Fei Labs core team vests their tokens over a long duration : “These tokens are subject to 5-year back-weighted vesting. Team members receive in each of the 5 years 10%, 15%, 20%, 25%, and 30%, respectively.”, and the Rari core team will also get on a long vesting schedule when they join.

I think this is especially important because you are active in multiple governances (e.g. Getty gets a ~150k$/year streaming COMP grant), so if we want your team to stay involved in the governance, you need to have a good reason for it, and if you stop being active, the DAO should be able to claim the TRIBE back.

XIII. Prohibitions
I would like to add the condition that all Rari smart contracts be verified on Etherscan before the merge happens, it was one of our conditions for the merge, leaving smart contracts unverified is a big deal, so this should be part of the snapshot.

XIV. Financial or Technical Statements

Rari Capital and Tribe represent that, to the best of their knowledge, any financial or technical statements, representations, documentation, or information are correct and that all reasonable, good-faith efforts have been made to ensure their accuracy. Any financial or technical statements, representations, documentation, or information officially disclosed by either Rari Capital or Tribe are declared as an appendix to this proposal.

Will GFX prepare these financial and technical statements, I don’t see anything in the appendix ? I don’t feel comfortable voting for a merge without more public details about :

  • the current holdings / profitability of Rari (Bruno’s comment is worrying, -20M$ equity with 7M$ yearly revenue in external assets is not a very good deal for 363M$, even if we get an amazing team of contributors at the same time and a cool road ahead with synergestic products)
  • the current amount of contributors and whether they are full-time, if they plan to stay after the merger, etc
  • An analysis of current token holders/vesting schedules would be very welcome too
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I largely agree with these points.

I don’t feel super strongly about the rageQuit() implementation (ie, multiple calls of collateralization oracle vs a single one) – however, one thing that makes it a bit more complicated is the extent to which the FEI in Fuse and Aave is borrowed right now. The price of Fei is stretched, Curve pool is imbalanced, etc – could cause problems with ragequitters trying to repay FEI debts.

I also agree that valuing TRIBE below IV doesn’t really make sense. It is definitely a value + growth play and a value < IV doesn’t encompass that. I think many doing analysis may miss this as TRIBE is such a unique asset within DeFi having such strong fundamentals and deep liquidity on DEX. Not sure how I feel overall about this, but listening to Jai and Joey talk about it made it seem like they have good ideas in store.

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