Sushi Tries to Pick Up the Pieces: A DeFi Governance Case Stud

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.


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.

State of play
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.


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.

Finances
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.

Crusade
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.