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The LayerZero Foundation, a nonprofit that supports the top cross-chain messaging protocol, proposed on Sunday to acquire crypto bridge Stargate in a move that aims to unite the two protocols under a single token.

Although both STG and ZRO jumped over 20% on the news, many STG holders condemned the offer, calling it “fundamentally flawed” and “inadequate.”

“It undervalues Stargate’s assets and potential while disproportionately benefiting LayerZero at the expense of existing stakeholders,” LLCgenerator, a pseudonymous STG token holder, said on the Stargate governance forum.

The proposal offers to convert Stargate’s STG token to LayerZero’s ZRO token, dissolving Stargate’s DAO in the process and costing the foundation about $138 million worth of ZRO, according to CEO Bryan Pellegrino.

It comes as investor interest in so-called altcoins, which includes tokens tied to DeFi projects, remains muted.

“The broader altcoin market still lacks the sustained capital rotation and structural demand necessary to break out of its historical range,” analysts at Bitfinex, a crypto exchange, previously told DL News.

The ZRO token is down 67% from its 2024 all-time high, while the STG token has lost 95% of its value since it launched in 2022. ZRO has a market cap of $258 million and STG has a total value of $179 million, according to CoinGecko.

Dilution

The problem is that those who have locked up their STG currently receive 50% of all fees the crypto bridge generates. Stargate is projected to bring in more than $1.4 million in annual revenue, per DefiLlama data.

After the acquisition, these fees will instead be used to buy back the ZRO token.

Detractors say the move dilutes STG holders and transfers value to LayerZero’s ecosystem without reciprocal benefits.

Crypto bridges like Stargate are important infrastructure. They let DeFi users send tokens between unconnected blockchains, linking billions of dollars worth of crypto.

LayerZero is a messaging protocol that lets users send information between blockchains. Stargate uses this technology to power its crypto bridge.

Confusing relationship

Both LayerZero and Stargate were developed by the same company, LayerZero Labs.

Despite the closeness between the two projects, Stargate was launched independently of LayerZero in 2022 along with its STG token.

Two years later, LayerZero also launched its ZRO token. At the time, many questioned why LayerZero needed a token when the main protocol that used its technology, Stargate, already had one.

The merger aims to simplify the relationship between the two projects, as well as giving Stargate more resources to pursue a broader mandate, the LayerZero Foundation said in the proposal.

To be sure, not all Stargate governance participants view the proposal negatively. A minority have expressed support, viewing a merger as a positive step for the long-term health of both projects.

Community feedback

It’s not yet clear if the merger proposal will proceed to a vote in its current form.

One pseudonymous governance participant called Exahash said the LayerZero Foundation’s proposal doesn’t follow the Stargate DAO’s guidelines, and that it should be revised before being put to a vote.

“Once community feedback has been gauged, a revised proposal with an acceptable offer should be submitted for a further seven days then voted,” Exahash said.

The LayerZero Foundation didn’t immediately respond to a request for comment.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.