Three-Body Problem: Challenges and Considerations for a First-of-Its-Kind Triple-Token Merger

Token holders for three different decentralized protocols have recently proposed a first-of-its-kind merger of tokens that would create an “Artificial Superintelligence Alliance” (“Alliance”) with a single token and a new, independent AI research and development foundation. At the same time, the Alliance will be comprised of the members of three existing blockchain foundations, which will continue as separate and independent organizations.

In this Legal Update, we examine the background for the Alliance and its structure and concepts by drawing comparisons with traditional corporate joint ventures (“JVs”). We also examine the practical challenges of operating a decentralized JV and highlight a few key challenges and questions that will need to be addressed in the Alliance’s implementation and governance.

Combinations of protocols and tokens are unusual but not unheard of. Over two years ago, Mayer Brown’s Digital Assets, Blockchain & Cryptocurrency group examined the largest decentralized protocol merger to date and compared and contrasted decentralized blockchain-based entity structures with their traditional counterparts.¹ Then and now, we think there is value to decentralized organizations in looking to forms of traditional corporate transactions—in this case, joint ventures—for guidance on integrations and governance.

Decentralized Protocols: The Basics

Many blockchain developers aim to “decentralize” their products—whether that be the core blockchain network, an application built on top of the blockchain, or a platform that combines several applications into a cohesive ecosystem—by making those products subject to a governance structure independent from the companies that built them.

As an example, in one common structure, a for-profit entity works on the development of a protocol through launch, but a substantial percentage of the tokens representing ownership of, or at least governing rights for, the protocol are assigned to a non-profit foundation charged with managing their distribution to best promote the ongoing development of the protocol and its associated ecosystem. These foundations usually have more “democratic” governance mechanics in place that require major proposals affecting fundamental aspects of the protocol’s ecosystem to be approved by majority vote— whether the voting stakeholders are all holders of that protocol’s token or some more narrowly defined subset.

The Alliance and Its Members

The stated goal of the Alliance is to combine three existing blockchain-based protocols into “the world’s largest open source, independent AI research and development foundation—with a unique focus to create decentralized Artificial Superintelligence.”² According to the Alliance’s “Vision Paper,” and the Alliance’s announcement,³ the initial members will be Fetch.ai, SingularityNET, and Ocean Protocol.

Each of the three members is a decentralized protocol with a focus on artificial intelligence. Fetch.ai provides a built-for-purpose blockchain platform where AI-powered “agents,” designed for a variety of commercial applications, can be deployed, marketed, and used. SingularityNET hosts an AI platform where users can develop, share, and monetize AI algorithms, models, and services. Ocean Protocol provides a data exchange as well as applications leveraging those data sources to provide AI-powered prediction feeds while preserving privacy.

Each of these platforms currently require that their own individual tokens (which go by the symbols FET, AGIX and OCEAN, respectively) be exchanged by users in order to purchase services on their platforms. In the Alliance proposal, all three tokens would merge into a single new token (ASI) in order to streamline their individual offerings into a single, aggregated ecosystem. The ASI token would be usable or redeemable for services or actions taken on any of the three platforms. The Alliance would also create a new foundation, distinct from any of the three existing foundations, to manage the operations of the consolidated ecosystem. If approved, the proposed merger will occur by mandatory conversion of the respective tokens, and the combined fully diluted value of the resulting unitary Alliance token is expected to be approximately $7.5 billion (based on current market prices).⁴

While the Alliance may be the first proposal of its kind in the blockchain space—combining a token merger with the formation of a new entity around which several existing foundations will collaborate—it resembles a traditional JV among two or more corporate entities in several ways:

• The Alliance will exist as its own, distinct entity (i.e., a foundation), in this case, incorporated in Singapore while each of the existing protocols will remain as independent legal entities after the Alliance is formed.⁵
• The existing leadership, teams, communities, and token treasuries of each protocol will also remain unchanged (aside from any token exchanges necessitated by the issuance of ASI tokens).
• The Alliance will have its own website, marketing and initiatives—separate from its constituent members’—and the existing protocols will have no fixed obligations to engage in cross-team collaborations.⁶
• The Alliance’s foundation will be guided by a governing council (the “Council,” which is analogous to, but not exactly like, a traditional board of directors) initially proposed to be consisting of Humayun Sheikh, founder of Fetch.ai, as chairman; Dr. Ben Goertzel, founder of SingularityNET, as CEO; and Trent McConaghy and Bruce Pon, co-founders of Ocean Protocol, as members.⁷

As a result, the Alliance members have proposed what could be considered the largest-ever decentralized JV. Typical JV vehicles are considered by companies seeking to mitigate or otherwise share the risks of a new venture or investment. JVs are contractual relationships between existing businesses or individuals (i.e., the members) and are often structured by establishing a new entity, co-owned by the JV members, which governs the JV business while maintaining some distance—from both a liability and commingling perspective—from the members’ own businesses. In the case of the Alliance, establishing a separate foundation may be advantageous in aligning business objectives and goals while preserving each project’s own foundation in order to allow for independent priority-setting and in case the new venture does not succeed. JV structures are also frequently preferred for combinations of more than two distinct entities, as JV members can explicitly contract around how the JV vehicle will operate, including on matters such as voting rights, board composition and the mechanics for resolving deadlocks.

These advantages were likely reasons for why the Alliance was structured in a very different manner than the largest previous business combination of two decentralized protocols: the merger between Rari Capital and Fei Protocol. Upon the formation of the Alliance, while the tokens of the three protocols will be merged, the existing business assets, treasuries, and corporate entities of each Alliance member will remain separate and intact. At the same time, the FET,⁸ AGIX, and OCEAN tokens will become defunct, and holders will be required to convert them at fixed rates of exchange for the Alliance’s new ASI token, but unlike in a traditional merger, the protocols will otherwise be left in nearly identical positions to their status before the merger—except that one (new) token can now be used across all three platforms.

The Costs of Decentralization

Unlike with traditional JVs, however, each project’s decentralization means that the Alliance’s JV entity will be required to navigate some novel additional hurdles. First, in order to promote decentralization for the new entity, the Alliance will be implementing voting mechanisms that allow ASI token holders to participate in important governance decisions. For example, in the proposed governance structure of the Alliance, adding new projects to the Alliance, expanding the ASI token supply, or making changes to the Constitution of the Alliance Council would each require (1) a 2/3 vote of the Council and (2) a majority vote of the ASI token holders.⁹ In addition, other significant actions could be brought to a similar vote, at the discretion of the Alliance Council.

However, approval by the Alliance is merely a prerequisite. Even if the Alliance were to agree on a proposal with both Council and token holder votes, under the current proposal, each of the three protocol foundations would also need to ratify the decision before any binding obligations could be made. At this point, it is unclear how these separate ratifications would take place after the separate tokens are exchanged for ASI tokens and merged out of existence.

In addition and conceptually, each member protocol has explored different methods of decentralizing itself, and accordingly each foundation is subject to different governing criteria. Highlighting this fragmentation, approval of the Alliance itself is subject to greatly differing mechanics from each of its members. While Ocean Protocol was able to “approve” the transaction to join the Alliance without holding any token holder vote, Fetch.ai’s token holders required three separate votes (one to merge the token, and then one each to partner with Ocean and SingularityNET), and SingularityNET’s token holders required a supermajority vote.

Key Takeaways

The proposed Alliance highlights the difficulties in operating decentralized businesses and implementing a business combination and integration in a decentralized context. For example, while introducing a JV foundation as an additional governance layer may bring advantages in achieving decentralization, it may also hinder timely and effective decision-making. In addition, while ASI token holders are entitled to participate in certain prescribed decisions, many others are left to the Council and the three protocol foundations themselves. Unlike a typical corporate board of directors, these decision-making bodies do not have fiduciary obligations to token holders.

Notwithstanding those complexities and challenges, the Alliance represents a unique attempt to combine several decentralized protocols into a single unified ecosystem that may ultimately generate benefits for its token holders and the goals they seek to achieve. To do so, there are a few key questions that will need to be addressed.

• Approach to Decentralized, Multilayered Decision-Making: The Alliance foundation will both be governed by a council of its members’ founders and also require approval of each members’ constituent foundations before entering into meaningful business collaborations. Success not only will require alignment between the Council members—who, as mentioned, will have no fiduciary obligations to the ASI token holders and will still hold operating positions with their own foundations—but also will require the voting members of each foundation and, in the case of major decisions, the collective token holders of ASI to all reach collective agreement. The Alliance has noted that subcommittees will be created to drive particular aspects of the collaboration, and the constitution of the Alliance may be amended if the current governance structure proves too unwieldy. However, the mechanics of this governance model are not yet clear; for example, the Alliance has not yet addressed how the three existing foundations will continue to identify bona fide stakeholders, or how subcommittee participation will be verified, when the individual governance tokens of each project are removed from circulation. It remains to be seen whether this experiment—a decentralized foundation comprised of decentralized foundations—can effectively compete in creating a competitor to the traditional technology companies driving the advancement of AI.
• Considerations for Token Holders and Investors: While the token merger will only occur if it is approved under the methods selected by each foundation, it’s likely that at least some token holders, validators, or decentralized autonomous organization (“DAO”) members will have the tokens they purchased drastically modified (in the case of FET) or rendered valueless until converted (in the cases of AGIX and OCEAN).¹⁰ As a general matter, DAOs are often ultimately controlled by only a handful of individuals who have the passphrase to a governing wallet (i.e., a “multi-sig wallet”) and, while those individuals may be motivated to act in the best interest of the DAO to minimize their own legal jeopardy, they often have no fiduciary duties to comply with the votes of token holders. Even when legal wrappers such as foundations are added to DAOs, token holders are unlikely to gain the traditional rights and protections that members of a corporate JV would typically be entitled to (e.g., legal duties of directors and access to information and records). Investors should research the governing documents of any decentralized protocol to fully understand their rights and the limitations, if any, on the protocol’s ability to act without the agreement of its token holders. In some cases, those governing documents may not fully describe these rights or cover all possible voting situations.
• Organizational Flexibility as a Strength and Weakness: As contractual arrangements, JVs inherently allow for more independence and flexibility than a traditional merger. In the case of the Alliance’s quasi-JV structure, each of the three members of the Alliance will maintain their separate legal existences with the same assets and employees as before and with minimal binding obligations to participate in the Alliance. Cooperation in the Alliance is largely optional for the foundations, which provides each a great deal of latitude in choosing how to operate in the future. At the same time, this flexibility may also be a limitation on the goals the Alliance can accomplish. While the stakeholders electing to accept the Alliance proposal can guarantee that their tokens will be merged, there are no assurances that the three protocols will ever meaningfully collaborate on future products. In comparison, a merger of the three protocols could have guaranteed that the three foundations coordinated together under a single governing body but would also mean that they ceased to exist and operate independently. The key takeaway for protocol founders or members considering a similar type of transaction or combination is that both mergers and JVs can be effective tools in decentralized business combinations. The merits and challenges of each will need to be carefully weighed against the goals of the proposed transaction.

¹ Decentralized Autonomous Organizations: When Code Mirrors Law.

² Artificial Superintelligence (ASI) Alliance Vision Paper, SingularityNET. The Alliance defines “Artificial Superintelligence” as AI systems “smarter than the smartest human.”

³ https://twitter.com/ASI_Alliance/status/1780221024082047381; https://fetch.ai/blog/artificial-superintelligence-alliance-token-merger-approved

⁴ The Alliance has announced this expected valuation based on the combined fully diluted valuations (i.e., the current market exchange rate of each token multiplied by the total number of tokens that will be released over time) of the three tokens being merged into ASI tokens.

⁵ Artificial Superintelligence (ASI) Alliance Vision Paper at 19.

⁶ Id. at 19-20.

⁷ Fetch.ai, SingularityNET and Ocean Protocol Unite to Create the Superintelligence Alliance.

⁸ Technically, following a “hard-fork” of the FET token contracts, the FET tokens will be renamed ASI and there will be an increase in the maximum supply of tokens, which will accommodate the conversion of FET, AGIX and OCEAN tokens in connection with the merger. See Artificial Superintelligence (ASI) Alliance Vision Paper at 28.

⁹ Artificial Superintelligence (ASI) Alliance Vision Paper at 20.

¹⁰ For US-based token holders, this conversion would also likely carry tax obligations that a holder would not have incurred if the merger were to have never occurred. See IRS Pub. 54.