mStable Acquisition Proposal

Introduction

Last week, @powers was contacted by Alastor, a crypto-focused mergers and acquisitions team inquiring about interest in a potential acquisition of the mStable protocol by DXdao. Chris and I had a call about it with members of the Alastor and mStable team at the end of last week and are now bringing it before the DAO as a whole.

mStable is a DeFi DAO that builds products on Ethereum and Polygon, mostly focused around yield generation. Fun fact: they launched their token on Mesa. They have a meta-stablecoin called mUSD and have been building out vault products using the new erc-4626 vault framework.

Unfortunately, some of their largest investors went insolvent last year due to the LUNA and FTX collapses and were forced to liquidate all of their MTA, causing the price to fall ~95%. This has left the project without sufficient runway and limited prospects to raise new money. They have reached out to a number of DeFi projects in the hopes of striking a deal to re-structure and continue to build as part of a new organization.

mStable Discussions / posts about the process:

If you really want to dive in, I recommend reading all the posts on the forum since James’ original to get a sense of where things stand.

Treasury

https://zapper.xyz/account/gnosis.mstabledao.eth
https://debank.com/profile/0x3dd46846eed8d147841ae162c8425c08bd8e1b41

Treasury Value as of 2023.03.06 is ~$2.15M in various assets, including stables, ETH, auraBAL, aura, CVX and more. This does not include MTA.

Token Stats

Websites:

Old App and products: https://app.mstable.org/#/
New App with MetaVault: https://yield.mstable.org/
Governance App: https://staking.mstable.app/#
Docs: https://docs.mstable.org/
Dev Docs: https://developers.mstable.org/
Forum: https://forum.mstable.org/

Assets to be considered:

  • Cash and Tokens from treasury, equaling ~$2.15M.
  • New 4626 metavault products. Currently there is one built on top of the CRV 3pool, convex, and a few CRV side pools. Another apparently ready that incorporates the FRAX pools. Additional ETH vaults are in production but still need auditing and some work.
  • There is ~$6M in TVL in their Save and metavault products, but a chunk (10-15%) of this are mStableDao treasury assets.
  • Certain Team members on the mStable Builder SubDAO, bringing expertise on 4626 metavaults. Full team costs roughly $185K/mo or 2.2M/year. Contributor list is here: https://mstable.notion.site/mstable/mStable-Team-518c659aba61442e85238963ad72a2f2

Based on current yield rates and their burn rate, none of their products are profitable or self-sustaining and apparently require 300M in TVL to be. This acquisition will not be EV+ if the only metric is revenue. It could be beneficial though if DXdao wants to expand its product offering into vault products (for retail or DAOs).

Products

mStable is a yield aggregator product that was built around a meta-stablecoin called mUSD. mUSD contains DAI, USDC, USDT, and sUSD, which are deposited into yield generating protocols like Compound and Aave, and allows for swapping between those assets. mStable uses a pricing function similar to Curve’s stableswap bonding curve to price the assets in the pools and allow seamless swapping between supported assets boosting yields for mUSD. This was the basis of the original mStable Save product, which has now been upgraded to a new v2 architecture, built by a new team hired last year.

mStable has a new Yield product that uses 4626 Metavaults to create a flexible vault structure that can be used to optimize yield. They have worked with other protocols and builders to further the development of the 4626 standard and it promises new potential interoperability and flexibility for building Vault products.

They have a first vault up and running that takes in USDC and seamlessly deposits funds into CRV and Convex and auto-compounds rewards. They apparently also have a FRAX vault ready to go and are working on a ETH vault that requires an audit and additional prep work. From review of the forum and discussion with James Simpson, they believe that their vault product is an exciting innovation in the space, but they are not in a financial position to continue to develop and maintain it. Specifically:

[T]he project will find it very difficult raise with the current token given its value; the protocol isn’t earning enough from its products to self-sustain; and the DAO’s runway is continuing to decrease each month and will be depleted at current burn within 12 or so months.
https://forum.mstable.org/t/rfc-the-future-path-forward-for-mstable/977

The metavault products need active participation to be maintained and have a set of 4 different keepers that keep the product running smoothly. Migrating this process to an automated one is a technical lift that will not be funded and should be considered an ongoing maintenance concern and cost.

mStables products have run smoothly and without any major technical problems or hacks. They are a well respected project and team that has been innovating in the space since since 2019/2020 and they did a token launch using Mesa.

Potential Deal Structuring

The numbers used in the exercises below make the following assumptions:

  • The amount of MTA that would be included in a deal does not include all MTA in existence.
    • MTA in the mStable Treasury or un-distributed staking rewards is not included. This accounts for roughly ~30M MTA.
    • An additional ~5M MTA in streams and other miscellaneous places, as well as smaller quantities of MTA locked that may not be worth the gas costs to move and/or redeem.
    • See this post for a breakdown of expected eligible MTA: https://forum.mstable.org/t/rfc-future-of-mstable-treasury-assets/999
    • This is not an exact science but based on the above 65,000,000 MTA is expected to be included in the deal.
  • The price of DXD is roughly $700/DXD
  • The current circulating supply of DXD is 22586.7 DXD
  • The Price of MTA is roughly $0.031/MTA
  • The current NAV value of the treasury is $23,789,996.83

100% DXD Token Swap

A token swap (MTA→DXD) that allowed for all MTA (fully diluted valuation, 65M MTA) to be swapped for DXD would add roughly 2878.57 DXD to the circulating supply (assume current prices of $700/DXD and $0.031/MTA).

  • Adding $2.15M to the treasury would increase its size by ~9%.
  • adding 2878.57 new DXD to the existing circulating supply of 22586.7 yields a new circulating supply of 25465.3, which is a 12.74% increase.

These 2 factors together would lower the redeemable value per DXD to ~$713. This is a 3.2% decrease from the current redeemable value per DXD of $737. To further mitigate these issues, DXD tokens acquired in a swap could be vested. For example, 50% of any received DXD could be available immediately while the other 50% could be vested linearly over a year.

Cash and Token Swap

The treasury could also structure the deal with a combination of funds from the treasury and DXD tokens. The weights of each could be adjusted as desired. As an example, a 50/50 cash/DXD split would only add ~1.075M to the treasury, but also only increase the circulating supply by 1439.3. This would yield a new redemption value per DXD of $724, halving the impact of the deal on DXD holders. Vesting could be structured similarly with a unvested ETH portion immediately available to MTA holders who swap and a DXD portion vested over a year.

Other Considerations

The parameters of this deal could be tweaked to come close to break-even for DXD holders from a token price standpoint in the short term. Spending more in cash up-front places shifts burden of costs from the initial purchase to ongoing maintenance and development costs. The DAO will pay for this one way or another, so the bigger consideration is whether the DAO is interested in acquiring the products and talent from mStable, and with it their subsequent costs.

There seems to be consensus among the contributors’ public statements on the forum that they would like to continue working on the MetaVault products if they are able to. It is likely that members of the mStable Builder SubDAO (the developers) will vote for the option that allows them to do so.

There is a strong argument that the technical expertise of the contributors to the project is the main value proposition that any acquiring organization would be buying. The smart contracts themselves and their architecture will most likely be fully open sourced, so the DAO would not be purchasing any particular IP. Secondary to that would be the existing customer base and reputation the mStable has, although it is unclear whether that value would translate to a re-branding.

Potential Value Proposition for DXdao

The mStable and Alastoor team pitched the following as a potential value add for DXdao:

Questions to ask:

  • Does DXdao want to incubate a new product vertical in Vaults?
    • How can these products be integrated into existing product or future products?
    • Does this product fit with the flagship vision and product?
  • If so, how much is it willing to spend to acquire expertise to do so?
  • Will DXdao commit to funding future work on these products?
  • Can any of the mStable contributors help in other roles the DAO needs if they are acquired?
  • Is it worth the DAO’s time to build these products in-house instead of integrating and curating outside versions. There will be other 4626 frameworks that are developed that can be built upon.

Timeline

The timeline for this process is accelerated. They are looking for Proposals by the end of next week (March 17th) so this would need to be discussed quite intensely here if we want to adhere to that timeline. Both entities will need to go through their governance processes and mStable governance participants will have final say in what direction they take. I am unsure what the outside interest for a deal is so I cannot say whether missing these deadlines will prevent a deal if the DAO proposes late.

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A few comments:

DXdao has never been an organization to act in a rushed manner, for better or worse. I don’t think a 2.9k DXD token swap is where that should start, especially with a net 3.2% dilution to DXD NAV. Probably even more, given that there would be differing liquidity weightings given to the non-ETH and non-stables assets.

I also think it would be best for @rossgalloway to have an active worker proposal/its equivalent prior to sitting in on calls representing DXdao wrt. such big decisions - the caneyfork link is kind of tenuous given that up to this point, it’s been widely understood that caneyfork == Chris Powers, for the purposes of contributing to DXdao. While it’s natural for organizations to expand, I think it goes against how DXdao works/should work to go from an outside third party, to sitting in on key strategic, and private, potential M&A meetings, without any worker proposal/some form of on-chain stamp of approval from the DAO, even if that’s just a ratified alteration to the Operations Guild’s makeup. After all, there has recently been discussion about people not being able to gain access to certain contributor chats without an active worker proposal to protect sensitive information and encourage proper participation in the governance process, so I don’t see too much difference here.

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100% agree with @hughesconnor’s comments above. Some points and questions:

  • Proposal that passes would need to be live in 3 days? The rushed timeline in a nonstarter for DXdao.
  • At first glance there is nothing interesting here from a product perspective. An unsuccessful stablecoin without differentiation. It’s fairly trivial to create such a product using other DeFi platforms such as Balancer, and if the yield product isn’t generating revenue then I doubt it’s relevant in a crowded space. Overall product seems like a nonstarter.
  • Even if people get past the above, what are the terms of the deal other than trading tokens? Trading tokens with whom? Who is actually representing the other side of this deal and why are they not posting? What does DXdao get and what would its obligations be? Seems some glaring omissions in terms of what structure is presented.
  • As Connor points out, it doesn’t seem appropriate for people to be representing DXdao without an approved worker proposal. It’s disappointing that Caneyfork is skirting governance in this way.
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I have fond memories of mStable as the first DeFi protocol I ever used.

However, the protocol/team has really done nothing of note since then. I don’t see why DXdao would be interested in this given that we have no experience with turning around underperforming/distressed assets.

Also the “forced liquidation of MTA” that is referred to in the initial post is bullshit. You can see on the volume/price trading of MTA in the past year that even though the price did go down, there was very little volume or liquidity. MTA is just another illiquid shitcoin, with worse liquidity than even DXD lmfao

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We will be discussing this on the governance call in just a bit, but I did want to provide a couple of quick responses:

  • I agree with @hedgedhog on the fond memories of mstable. MTA actually launched its token sale through Mesa in summer of 2020! MTA was when you knew DeFi summer was going to be a thing. It was post COMP launch, but pre YFI, pre CRV and pre-UNI.

  • I also agree with @hughesconnor & @JohnKelleher on the time line and the pessimistic perspective on where the product is at. The timeline comes from Alastor and I also agree that it should not constrain DXdao. This post was meant to open the conversation in DXdao to see if there is anything remotely close to a deal that could work. I also agree there is no value in the product/protocol, but wonder if it could be a good acqui-hire for a few of their technical contributors. And, of course, the acquisition would also acquire the mStable treasury assets. So the cost to DXdao would be the premium to book value, plus whatever increase in spend would be committed to bring on some engineers. I’m not sure if this is possible, but I think it’s the only avenue for a deal that makes sense for DXdao.

  • Re: Ross/Caney Fork. I’m sorry there is confusion. Ross works for Caney Fork. DXdao is not paying for his services. I am still at 90% of my time commitment to DXdao as I’ve been for the last two years. The guys at Alastor contacted me to see if DXdao was interested in the mstable deal. I went back and forth with them over telegram and then we agreed to do a call with James from mStable. I invited Ross (and Sky) to the call to take notes and had Ross write a summary of the call and potential next steps. I think those are laid out above for the DAO. I hear your feedback but I do not think I (or Ross) misrepresented anything here. I hope I can make it clearer going forward. Ross is also a longtime member of the DXdao community (joined forum in August 2020)

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FYI, I told Alastor last week that it wasn’t a right fit for DXdao.

It looks like there are four proposals right now in the mstable forum:

dHedge/Origin maybe th most promising? But all the payments seem to be in governance tokens…which doesn’t sound too appealing for acquiring the $2m treasury…