SushiSwap is in flux. (Jakub Dziubak/Unsplash, modified by CoinDesk)
Sushi Tries to Pick Up the Pieces: A DeFi Governance Case Study
The popular automatic market maker is pushing an ambitious governance overhaul after months of infighting. What's next?
Andrew Thurman
After months of public infighting and turmoil, popular decentralized finance (DeFi) platform Sushi has cleared the first stage of community voting for an ambitious governance overhaul designed to streamline internal processes with a hierarchical, departmental structure.
The proposal appears to conclude the latest chapter in a remarkably turbulent story about the protocol's fall, rise and fall again – a case study for the oncoming and so far largely ebullient era of decentralized autonomous organizations (DAOs) and their unique governance structures.
Over the past two months, Sushi has been marred by internecine spats, accusations of corruption in governance forums and opaque processes – a saga reminiscent of the project's chaotic early days, when pseudonymous founder "Chef Nomi" nearly ended the fledgling experiment by seizing and subsequently returning a multimillion-dollar development fund.
Read more: 'I F**ked Up': SushiSwap Creator Chef Nomi Returns $14M Dev Fund
The turmoil has pushed the price of Sushi's governance token, SUSHI, down as far as 78% off its all-time high of $23.28 that was reached in March. Uniswap's UNI, meanwhile – the ostensibly centralized and venture capital-funded project SushiSwap was meant to act as an alternative to – is down just 30% over the same period.
The stumbles have likewise turned the project into a popular punching bag for decentralized governance skeptics who argue that Sushi's failure to effectively manage internal strife highlights the limitations of DAOs in running competitive businesses.
In spite of the rancor, however, with $5.2 billion in total value locked (TVL), SushiSwap remains a jewel as a top-15 DeFi protocol.
Even after the exodus, according to core contributor Rachel Chu, there remains 22 full-time contributors and another 40 frequent contributors in the Sushi Factory grants program. A major upgrade to the core decentralized exchange product, Trident, is estimated to launch in January, despite recent delays.
In short, there are multiple reasons to believe that the protocol can turn its fortunes around – perhaps chief among them being that yet another comeback story could be tremendously lucrative for token holders.
Interestingly, SushiSwap's overhaul may provide the first substantive example of activist investors swarming the virtual boardroom that is DeFi governance.
The bulk of the operations overhaul proposal comes from a pair of investors: Alex Woodard of investment management firm Arca and Dean Eigenmann of investment firm Dialectic, with additional input from Daniele Sesta, the prolific developer behind the Magic Internet Money and Wonderland cryptocurrencies, among other contributors.
Read more: Sushi Jumps 10% After Top Avalanche Developer Proposes Takeover
On Wednesday, the proposal passed a "signal" vote with over 88% approval, paving the way for an overhaul of Sushi's leadership and organizational structure following a definitive final vote next week.
In an interview with CoinDesk, Chu said that the overhaul's success has lifted team spirits.
"Core team-wise, we're very optimistic because of the overwhelming support from the industry," she said. "But the other aspect of this challenge is to understand where we are, how we got here and how to get back on track – that's something we still have to do."
In an interview with a half-dozen current and former protocol contributors, investors and community members, CoinDesk attempted to do the same: tracking how Sushi went from an inefficient DAO to a fledgling business operation, only to backslide into organizational chaos once more – a story that reveals the pitfalls of trying to maintain transparency in a decentralized governance structure while effectively managing and running the operational aspects of an ever-evolving project.
One key pain point for the organization was a failure to establish more orderly financial and accounting practices as the DAO grew.
In September 2020, just weeks after Chef Nomi absconded with the developer fund (only to later return it), the DAO was in a rudimentary state. Elections were held to establish a multisig of DeFi community members, such as Sam Bankman-Fried, CEO of crypto exchange FTX, to manage the treasury and push the project forward, as well as a proposal to hire former community manager 0xMaki to lead the project. However, that structure meant that the team needed approval from a majority of the multisig for any form of discretionary spending.
According to pseudonymous former contributor LevX, that situation led to the creation of a second multisig consisting of more readily available signers who worked primarily on Sushi.
"Whenever we needed money last year, we needed to persuade five people who were super busy, so Maki decided to create the ops multisig so we could transfer funds from the main treasury to ops multisig to use it quickly and efficiently," he said.
LevX told CoinDesk that at first four people managed the new operations wallet with a budget of 200,000 SUSHI (over $500,000 at the time) per month, but there were constantly new employees joining and the criteria for who was on-boarded as an ops signer was opaque. Despite having left the core team in June, he is unsure if he is still one of them.
"It wasn't handled professionally. It was pretty ad hoc," he said.
The team never hired an accountant or treasurer, and an effort to institute an "inverted pyramid" system of communication – where decisions were discussed internally among team leadership, then the wider team, then with the community – quickly led to internal tensions, as many felt not all financial processes were sufficiently transparent.
"I think transparency is key to all things in crypto, especially DeFi," LevX told CoinDesk.
BitDAO troubles
One instance where financial dealings led to tensions was the BitDAO deal.
In August 2021, Sushi's Miso auction platform hosted the BitDAO public token launch, selling 12,767 ETH to create an initial BIT-ETH liquidity pool. Landing BitDAO, a decentralized hedge fund backed by the likes of PayPal co-founder Peter Thiel and the Bybit crypto exchange, was a major win for the Miso platform.
However, the team eventually realized that hosting such auctions could lead to regulatory scrutiny. The misstep was among the key motivating factors in asking Maki, who led the project through the Chef Nomi saga, to step down. While the transition was initially reported as Maki's decision, multiple sources confirmed to CoinDesk that the choice to remove him came internally.
Read more: Sushi Core Contributor 0xMaki Transitioning to Advisory Role
"The development team voted 11–6 for off-boarding and we approached Maki," said one former contributor who spoke on the condition of anonymity. "We asked him to take an advisory role, which was a sincere offer that he accepted consensually. We also offered that he keep his [SUSHI vesting schedule] as he was a catalyzing force in saving Sushi early on."
Because of the regulatory concerns, the Miso platform also couldn't charge a fee for the auction. Sushi's legal team, however, advised that contributors could receive an allocation of BitDAO tokens directly for "services rendered."
That grant allocation was distributed disproportionately among the team, with most team members receiving 88,000 BIT tokens and five contributors receiving 300,000 tokens. The team members who received larger bonuses have since returned the tokens.
While one former contributor argued that "personnel working directly on a project and/or leadership will see an outsized bonus based on their performance," both the circumstances around Maki's exit and the bonuses ultimately led LevX to launch a broader campaign against core team members in the name of transparency.
LevX's exact goals and strategies appear at times to be contradictory. One of his initial steps was gathering allies, including current head of engineering, Matthew Lilley; semi-anonymous core contributor Amanda; and pseudonymous core contributor AG. Lilley didn't respond to a request to interview.
"Matt, me, Amanda and some others tried to dig into what was really happening, why they were trying to hide the deal. We asked multiple times and there was no clear answer, but they thought it was cyberbullying or something," LevX told CoinDesk of his efforts.
Indeed, the effort appears at times to have been obsessive. CoinDesk reviewed chat transcripts from a group named "JORK's dirty secrets" – an acronym for former Chief Technology Officer Joseph Delong, pseudonymous core contributor Omakase, Rachel Chu and pseudonymous core contributor Keno. There, LevX and others gossiped about recent hires and evaluated their colleagues based on loyalty to the project's leadership.
One chat log provided to CoinDesk by LevX also gives a glimpse into how his demands manifested in team channels. What starts as a discussion about compensating Omakase, who lost a significant portion of his Sushi team allocation in the most recent CREAM hack, quickly devolved into a re-litigation of the BitDAO deal and Maki's exit.
In a tweet, former CTO Delong compared the constant second-guessing and backbiting as a form of sabotage:
In a post on a Discord channel for one of his many side projects, LevX seems to acknowledge that his campaign was undermining Sushi's performance. "I have been fighting with corrupt sushi members from October, almost every day," LevX wrote, adding: "some of you hate me because the sushi price dropped."
LevX told CoinDesk that his efforts were "always for the Sushi community" and all he wanted to accomplish was greater transparency.
"If Sushi is being corrupted, someone needs to speak up. As far as I experienced, there's not a lot of people who thought it was wrong – they wanted to hide it. They didn't want to share the information with the rest of the team," he said.
'Iron rice bowl'
Multiple current and former contributors argued that LevX's paeans to transparency ring hollow, however.
In particular, they point to a relationship between LevX and Amanda, who are now married, a relationship that went undisclosed for months.
Multiple contributors told CoinDesk that the LevX was integral in pushing for Amanda's initial hiring despite a lack of qualifications. Additionally, LevX used funds from a grant awarded to develop Shoyu, a SushiSwap-funded NFT (non-fungible token) platform that Amanda worked on as a product manager, to attract investors to a DAO side project.
When asked about these allegations in a series of follow-up questions, LevX denied the claims, saying those events "never happened," and in a tweet referred to the allegations as "fake news."
CoinDesk reviewed chat transcripts between LevX and Omakase where LevX pushes his colleague to support Amanda's hiring without disclosing their relationship, and a recent blog post promotes that LevX's side project, the LevX DAO, would use a portion of his Shoyu salary to distribute ETH rewards to token holders.
Regardless of whatever degree LevX and Amanda materially profited from their undisclosed relationship, current and former contributors also say it created toxic workplace dynamics.
"These kinds of benign interactions add up to a disturbing interaction. Knowing that two colleagues have been married and passing every piece of information you gave them. I think this would be an odd interaction even if they were not a destructive force," said one former contributor. "I can't imagine working with my spouse for months and not letting my co-workers know."
Omakase expressed frustration that the two claimed to be pushing for a flat, transparent hierarchy while also coordinating behind the scenes, adding that it was "unhealthy" for a family's income to rely entirely on one source. He likened the dynamic to two people attempting to protect their "iron rice bowl," a popular Chinese euphemism for job security.
"It's absolutely normal and necessary for relevant personal relationships to be disclosed in normal organizational settings primarily due to concerns of nepotism. The lack of disclosure has a few very clear implications regarding conflicts of interests," he said.
Normally, a project could simply get rid of troublesome employees. However, where team leadership had previously claimed such authority, that power eroded after the BitDAO deal .
Early employees, such as LevX and Omakase, had to post governance forum proposals for the token holder community to approve their hiring. Once Maki took the reins, hiring and firing became an internal process, but there was never a governance proposal that explicitly granted any party that authority, and after Maki left, the organization "descended into a flat hierarchy," as Chu put it.
"We descended into this interesting state where we had to vote – a democratic vote – on whether to offboard people. No organization has that – they have human resources, performance reviews. But these people said, 'We want the best for the community,'" said Chu.
LevX admitted that much of the tension was a result of personal animosity between himself and Delong, who attempted to maintain hierarchy in the wake of Maki's departure.
"[Delong] wanted to make Sushi a traditional company. Which isn't bad, but in his own way, he started mixing it with the previous Sushi style," said LevX.
Multiple contributors report that this period was marked with growing infighting, name calling, cyberbullying and unprofessionalism from various parties.
Processes aside from hiring and firing also grew contentious. Various team members called for internal votes on basic decisions and procedures, despite the outcomes of votes routinely being ignored: Information about the BitDAO deal was leaked to the media in spite of a vote against it, for instance.
"We had no ability to block or avoid these malicious acts," Chu said.
Leaks became prevalent, even as efforts were made to weed out the leakers: Eventually, one of LevX's allies in AG was fired by team vote, and she has since been identified as the primary party responsible for a leak of chat transcripts that led to a major exposé in hack-focused publication Rekt last month.
"Dissent usually attempts to expand the available audience – we're seeing various public narratives, mostly false, as a result," Omakase said of the dynamic. "Ultimately, though, there needs to be a maximum level of escalation or every disagreement escalates to public domains."
"I think the bifurcation in the team was between contributors who wanted a traditional hierarchy and contributors who wanted some idealist collectivism. The collectivists won in the sense that they essentially destroyed an amazing team," said one former contributor.
Restructure proposal
The exodus of talent may be only a temporary victory for those in favor of a flat hierarchy, however.
The unified restructure proposal that passed an initial vote yesterday borrows heavily from the corporate governance structure, with multiple discrete departments, department heads, levels of authority and hierarchy – and guidelines for orderly internal and external review processes.
"Structurelessness or flat hierarchies are dangerous especially in anon and remote teams because it lacks clear checks and balances as well as accountability," said Dailectic's Eigenmann of the proposal. "I think this hierarchy can resolve that issue.
"We think that cleaning up the DAO structure will be a way to accelerate SushiSwap to the next stage. We've worked closely together with the core team and investors to get this over the finish line," he added.
Even with the new structure, the internal tensions that eventually exploded in public appear as if they may linger.
In a Twitter thread earlier in the month, LevX announced he was stepping away from Shoyu, citing mental stress and suicidal thoughts, and Delong likewise stepped away last month. However, members of the various factions that butted heads still remain on staff, and it remains to be seen how they will collaborate following the restructuring.
Omakase in particular remains a frequent target for trolling in Sushi's governance forums, particularly from self-professed members of the LevX DAO. Omakase notes, however, that for all the noise, those calling for him to be fired have little actual power: Despite LevX being one of the largest recipients of sushi from his hiring proposal, he sold the majority and possesses few tokens with which to weigh in.
The restructuring proposal includes Omakase's appointment as head of operations and business development and passed with over 88% of the voting weight. The architects of the restructure "know who are the good actors and who are the bad actors," Chu added.
Additionally, Chu said that the team is rallying behind the new vision.
The "core team has really unified the past few days," she said. "We've had really productive all-hands meetings where we come together and discuss that anything needs to be put past us, and we want to look to the future."
Internally, the team has been working through the sometimes painful process of acknowledging mistakes and taking stock of how the protocol and its communications "descended into chaos," as Chu put it.
"Sushi is at an inflection point where we need to be able to cross this minimum viable threshold where we can scale, do it transparently and productively, while also maintaining autonomy," Chu said.
One current contributor who spoke on the condition of anonymity said that many of the tensions, battles and disagreements simply boil down to Sushi ending its "honeymoon period" – one where everyone made money and everyone had an incentive to maintain their vision of the status quo.
"Let's be clear, there's a lot of accumulated social capital from a protocol emitting $500 million in rewards. Is this sustainable? Clearly not. The hard work is and will continue to be collectively optimizing protocols and surrounding processes for growth once this honeymoon period is over," the contributor said.
During the course of reporting for this story, multiple DeFi founders and personalities expressed hope that SushiSwap could weather the turbulence and emerge successful, saying the project's genesis represents particular DeFi ideals.
"Sushi is one of the only community-run projects. If Sushi has fallen from the stage, it's a slap in the face of decentralization," Chu added.
Andrew Thurman is a tech reporter at CoinDesk with a focus on DeFi.
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