Future Outlook: DeFi, NFTs, and the Next Wave of Crypto M&A

Disclaimer: The information provided herein is for general informational purposes only and does not constitute legal advice. This blog post reflects observations on current developments in decentralized finance (DeFi) and non-fungible tokens (NFTs) as they relate to mergers and acquisitions (M&A). Always consult qualified legal counsel to address any specific questions or concerns related to your particular circumstances.

Introduction

The rapid rise of decentralized finance (DeFi) and non-fungible tokens (NFTs) has dramatically expanded the scope of cryptocurrency markets. What began as niche concepts—smart contracts enabling peer-to-peer lending and unique digital collectibles—has blossomed into a multi-billion-dollar sector¹. Large financial institutions, venture capital firms, and even government agencies are taking notice of the transformative potential these technologies hold.

Mergers and acquisitions (M&A) are increasingly becoming the preferred strategy for consolidation, allowing established DeFi protocols to acquire smaller competitors for talent and technological innovation. Meanwhile, NFT platforms may merge or partner with gaming, entertainment, or sports organizations to diversify their offerings and enhance user engagement. As noted in various reports, the market for NFTs alone soared above $20 billion in trading volume in 2022, underscoring the economic impact of these emerging assets².

Despite the promising opportunities, M&A in this space also entails significant complexities. From navigating unique token governance mechanisms to grappling with uncertain regulatory classifications, acquirers must perform robust due diligence to avoid inheriting liabilities or alienating stakeholder communities. This blog post provides a detailed examination of the primary considerations in DeFi- and NFT-focused M&A, including governance challenges, intellectual property (IP) rights, cross-chain interoperability, regulatory risks, and strategic planning for founders.

1. DeFi Acquisitions: Governance and Liquidity

One of the most distinctive aspects of DeFi is the empowerment of token holders to participate in project governance through community voting. These governance tokens, often structured to comply with evolving regulatory guidance³, confer the ability to propose protocol changes, set fee structures, and influence yield farming strategies. When an M&A transaction involves a protocol with a sizable number of token holders, the acquirer may be stepping into a situation where governance is decentralized and, in some cases, contentious.

• Governance Tokens and Voting Power: Acquirers should evaluate the distribution of governance tokens to understand how voting blocks might influence future decisions. A large, vocal community can introduce operational unpredictability if governance proposals are at odds with the acquirer’s strategic goals.
• Liquidity Mining Programs: Many DeFi protocols rely on yield farming incentives—where participants earn additional tokens by staking or lending crypto assets—to attract liquidity. However, user sentiment in these programs can change quickly in response to market shifts or competing protocols offering higher yields⁴. This volatility can significantly affect the DeFi platform’s valuation.
• Smart Contract Risk: DeFi relies heavily on automated smart contracts. Flaws in these contracts can be exploited, leading to sudden losses in total value locked (TVL). Thorough technical due diligence, including third-party audits, is imperative before finalizing any DeFi-related acquisition.

2. NFTs and Intellectual Property Rights

Non-fungible tokens (NFTs) have transcended the realm of digital art to encompass collectibles, music rights, virtual real estate, and more. According to the U.S. Copyright Office and various international intellectual property offices, the ownership of an NFT does not always equate to full ownership of the underlying IP, which makes M&A deals in this space particularly nuanced⁵.

• Scope of IP Rights: An NFT may include embedded smart contract terms specifying royalty payments to creators upon each resale. Acquirers need to ascertain whether these royalties transfer after the platform sale and whether the underlying creative content is licensed, assigned, or merely displayed. Failure to verify these rights can lead to infringement claims.
• Secondary Market Considerations: Most NFTs derive value from their secondary trading potential on platforms like OpenSea or Magic Eden. M&A deals may need to preserve existing marketplace relationships and API integrations to maintain a robust user base. An abrupt shift in marketplace strategy can alienate collectors and reduce trading volumes.
• Brand Partnerships: High-profile NFT drops often involve partnerships with celebrities, sports leagues, or entertainment franchises. The acquiring entity should confirm the scope and duration of these partnership agreements to ensure continued revenue streams post-merger.

3. Cross-Chain and Interoperability Deals

The congestion and rising transaction fees on Ethereum have led many DeFi and NFT projects to explore alternative blockchains such as Solana, Polygon, or Avalanche⁶. Cross-chain tools and interoperability solutions have consequently become fertile ground for M&A, as platforms seek seamless user experiences that bridge multiple networks.

• Technical Due Diligence: Evaluating cross-chain bridges involves assessing cryptographic proofs, oracle services, and overall security posture. A single exploit in a bridge’s smart contract can imperil large amounts of locked collateral.
• Licensing and Partnerships: Many interoperability solutions depend on licensing deals with different blockchain foundations or established validators. Buyers should investigate any exclusivity or revenue-sharing clauses embedded in these agreements.
• Scalability and User Adoption: While interoperability can broaden a protocol’s user base, it also entails managing varied user experiences across different chain ecosystems. This operational complexity affects support and maintenance costs post-acquisition.

4. Regulatory Unknowns

The legal classification of digital assets, especially governance tokens and NFTs, remains in flux. Regulators like the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and counterparts in the EU, UK, and Asia are actively issuing guidance and enforcement actions⁷. Potential acquirers must continually monitor developments to ensure compliance.

• Securities Law and the Howey Test: Governance tokens can be deemed securities if they meet the elements of the Howey test (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)). Acquiring a protocol that has offered tokens without proper registration or exemptions may expose the buyer to liability.
• Money Services Business (MSB) Requirements: DeFi platforms that facilitate swaps, lending, or other financial services could be viewed as MSBs in some jurisdictions, triggering anti-money laundering (AML) and know-your-customer (KYC) obligations.
• NFT Classification: While most NFTs are treated as unique collectibles, certain fractionalized or revenue-sharing models could be construed as securities, according to statements by some regulators⁸. M&A transactions must address these considerations to avert post-closing enforcement actions.

5. Strategic Outlook for Entrepreneurs

Founders and investors in DeFi or NFT ventures aiming to position themselves as acquisition targets—or seeking to acquire smaller projects—should consider the following strategies:

• Focus on Compliance: Entities that proactively align with securities laws, AML/KYC regulations, and consumer protection statutes are significantly more attractive in an M&A context. Demonstrating a history of clean regulatory audits and robust compliance policies can command a valuation premium.
• Build Robust Communities: Both DeFi and NFT ecosystems rely on active user participation, whether through voting, staking, or collecting. A large, loyal community enhances an acquirer’s confidence in the long-term viability of the platform.
• Prepare for Cross-Chain Compatibility: Projects that can easily port or integrate across multiple blockchains tap into broader user bases. This technical agility often appeals to acquirers who wish to future-proof their portfolios against evolving network preferences.
• Plan for Reputation Management: The DeFi and NFT markets are heavily influenced by social media sentiment. Maintaining transparent communications, especially during an M&A process, can help preserve user trust and mitigate negative speculation.

Conclusion

The accelerated evolution of DeFi and NFTs heralds a period of dynamic mergers and acquisitions. Bolstered by rapid technological innovation and growing institutional interest, these sectors offer lucrative opportunities for consolidation and strategic expansion. Yet, success in this arena demands rigorous technical, legal, and regulatory due diligence.

Market participants face challenges such as decentralized governance, complex smart contracts, cross-chain interoperability, and shifting regulatory sands. Nevertheless, thorough planning—coupled with well-documented compliance and a supportive user community—can position a project to thrive in this next phase of crypto M&A. As large financial entities increasingly step into the DeFi and NFT space, entrepreneurs equipped with a clear strategic vision, robust legal framework, and adaptable technology stack stand poised to capitalize on the many opportunities that lie ahead.

Sources Cited:

1. DeFi Pulse, “Total Value Locked in DeFi.” Accessed 2023.
2. NonFungible.com, “NFT Market 2022 Report.” Published 2023.
3. SEC, “Framework for ‘Investment Contract’ Analysis of Digital Assets.” April 2019.
4. C. Li, et al., “The Impact of Yield Farming on Liquidity in DeFi Markets.” Crypto Research Journal, 2022.
5. U.S. Copyright Office, “Copyright and NFTs: A Brief Overview.” May 2022.
6. Solana Foundation, “Solana Network Update.” Q1 2023.
7. U.S. Department of the Treasury, “Financial Crimes Enforcement Network (FinCEN) Guidance on Virtual Currencies.” 2019.
8. UK Financial Conduct Authority (FCA), “Guidance on Cryptoasset Classification.” 2020.

Note: The above sources offer a starting point for further reading but do not constitute an exhaustive list of applicable regulations or market data. Always confirm the most recent updates and legal requirements in your jurisdiction.