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Overpopulated Crypto Industry Destined for Token Consolidation Through M&A Wave

Too many tokens with insufficient utility may trigger hostile takeovers 

The crypto ecosystem is oversaturated with tokens, according to experts, with over 13,000 tokens in existence but lacking the adoption and utilization to justify such numbers. The total market cap stands at a staggering $2.5 trillion, raising questions about the necessity for so many tokens when the technology's adoption isn't commensurate.

Julian Grigo, head of institutions and fintech at smart-wallet infrastructure provider Safe, attributes this proliferation to the excessive funding during bull markets. He states: 

"Venture capital and excessive funding rounds during bull markets have led to the creation of a slew of projects often looking to solve similar challenges, just taking a slightly different approach."

Chiliz network CEO Alex Dreyfus echoes this sentiment, declaring: 

"There are already too many tokens and too many 'projects,' for not enough adoption and utility." 

With too many tokens chasing limited real-world use cases, consolidation through mergers and acquisitions (M&As) is seen as an inevitable solution.

M&A activity expected to increase

Drawing parallels to the dot-com era of the late 1990s, the crypto industry is expected to witness a wave of M&A activity to streamline the oversaturated token landscape. 

While M&A activity in crypto is still in its infancy, Grigo believes "increased M&A activity amongst projects that share a common goal" will become more prevalent as interoperability plays a crucial role in aligning ambitions.

One recent example is the three-way merger of AI-related projects Fetch.ai, SingularityNET, and Ocean Protocol, which combined to create a 7.4 billion dollar token aimed at forming an "AI collective" to counter Big Tech firms.

Dreyfus, who has expressed interest in "some aggressive M&A" this year, states: 

"Eventually, consolidation will be key."

Challenges of crypto M&A

Despite the potential benefits, executing M&As in the crypto space is not without its challenges. As Grigo notes: 

"The crypto M&A market is still in its infancy and, as such, there often isn't a template or rulebook in place which can make deals more difficult and complex."

Unique to crypto is the nature of token markets, where tokens rarely become worthless. As Dreyfus explains: 

"M&A is harder in crypto, because there is a lot of money in crypto trading and therefore, unlike traditional finance, where a 'stock' could die … crypto never dies. Everything is always a trading opportunity."

Another hurdle is the decentralized ethos of crypto. Shayne Higdon, co-founder and CEO of The HBAR Foundation, questions: 

"With crypto, where the ethos is open-sourced and decentralized, what are you actually buying or merging? Are you merging operations or just a token? The former is incredibly difficult to do when the business is centralized and will be infinitely harder in a decentralized world."

Structuring crypto M&A deals

For M&A deals to succeed in crypto, crucial considerations include identifying synergies between projects, ensuring a competitive edge for the merged entity, and structuring tokenomics to incentivize token holders to approve the deal.

Grigo suggests: 

"From an infrastructure side, we will increasingly see interoperability play a crucial role in aligning these ambitions and likewise, I expect to see increased M&A activity amongst projects that share a common goal."

Oleg Fomenko, co-founder of Sweat Economy, outlines different approaches based on a project's decentralization level. He says: 

"For projects where founders, investors, or teams control the bulk of circulating supply, it is easy to negotiate the deal with a small number of players," 

"Whereas for sufficiently decentralized projects, it is easy to launch a 'hostile takeover' making the offer for tokens to all token holders in order to accumulate a sufficient amount to influence the governance of the protocol."

Other factors include increasing project awareness, reaching a larger community, and creating a stronger team to achieve common goals.

Regulatory landscape: boon or bane?

In traditional finance, regulatory uncertainties often pose significant hurdles for M&A deals, with high-profile failures like Qualcomm's attempted $40 billion takeover of NXP Semiconductors being blocked by China, and BHP Billiton's $39 billion hostile bid for Potash Corp thwarted by Canada.

Crypto's relatively immature regulatory environment could be a double-edged sword for M&A activity. Fomenko believes the current climate may benefit projects with significant treasuries, active teams, and communities, allowing them 

"to take advantage of the current regulatory climate and acquire other businesses before M&A regulation emerges in this field."

Conversely, Grigo suggests a clearer regulatory regime 

"might incentivize bigger M&As as it could encourage larger financial institutions to step in as they'll have a better idea of how regulators will see a potential deal."

The lack of a centralized medium to deliver takeover offers to all token holders is also cited by Fomenko as "one of the biggest barriers right now for the Web3 ecosystem."

What to watch for in crypto M&A

As consolidation gathers pace, industry observers foresee M&A activity across various crypto sectors, from layer 1 chains and decentralized exchanges (DEXs) to DeFi protocols, node operators, and even NFT projects.

According to Aki Balogh, co-founder and CEO of DLC.Link: 

"The next wave of M&A is likely to occur in sectors where there is a high degree of fragmentation, like Layer 1 chains that didn't break Top 10, DEXs, DeFi protocols, node operators, and possibly even NFT projects."

Grigo expects traditional players to acquire "the most innovative" Web3 projects, stating: 

"I don't see any one specific area that is immune to consolidation."

However, only high-quality projects with sophisticated analytics capabilities and the ability to reach token holders effectively will command top valuations. As Fomenko predicts, "The big winners of this trend are likely to become businesses that have very sophisticated cross-chain analytics capabilities as well as businesses able to deliver the message to the holder of the specific token about the potential offer."

And in a tongue-in-cheek prediction, Fomenko envisions consolidation reaching a "fever pitch" in the memecoin sector, leading to the emergence of tokens like "ShibaPepes" and "FlokiDoges."