I believe the highly unpopular move to redirect 100% of Sushiswap’s Kanpai to the treasury to fund operational expenses was likely the best option out of a bad bunch.
In late 2020, the throws of DeFi summer still heavy in the air, Sushiswap- a fork of the overwhelmingly popular Uniswap- launched. With Sushiswap pumping out SUSHI tokens to yield farmers, many jumped ship and took their liquidity from Uniswap to Sushiswap: the vampire wars began. This led to Uniswap creating a token and airdropping it. However, the major difference between these protocols was tokenomics, specifically xSUSHI.
Liquidity providers received SUSHI on Sushiswap, which could be locked in exchange for xSUSHI, and xSUSHI holders were entitled to a portion of all the revenue generated on the platform. It introduced a second dimension of earning for yield farmers, who could receive SUSHI tokens in exchange for LP tokens, but also a portion of all platform revenue if they opted to lock their SUSHI tokens.
What’s important is that xSUSHI was the greatest differentiator between Uniswap and Sushiswap: xSUSHI entitled holders to a percentage of all revenue generated by Sushiswap and is known as Kanpai.
The Kanpai Proposal & Runways
The initial Kanpai proposal came in June 2021 during the 2021 summer crash from Yuan Han Li. It outlined the dangers of the Sushiswap DAO treasury’s huge exposure to SUSHI. It argued that 10% of the revenue going to xSUSHI stakers (Kanpai) should be swapped to ETH/ stablecoin and redirected to the treasury. This would help shield from market downturn and give the treasury sufficient means to fund operational expenses.
The proposal passed with 74% in favor and 26% against. This marked the first redirection of revenue earmarked for xSUSHI holders.
The second Kanpai proposal came from Sushiswap’s head chef Jared Grey in October 2022. This proposal outlined the need for revenue to be directed away from xSUSHI holders in order to fund the operational runway. This proposal was withdrawn by Jared Grey and republished two months later in December.
The third Kanpai proposal came in December 2022 and passed with 58.95% in favor, 40.98% against, and 0.07% abstaining. Two whales muscled through the proposal observable in the snapshot. Whale 1 and Whale 2- Golden Tree, a large American asset manager with a digital investment arm.
The proposal from the Head Chef detailed how Sushiswap only had one and a half years of runway left. The situation was dire even after trimming fat and reducing the operating budget from nine to five million dollars. Hence, 100% of the Kanpai was diverted from xSUSHI holders to the treasury for one year or until new tokenomics could be implemented.
Jared Grey acknowledged that this resort was:
‘A temporary solution to a long-term problem.’
Looking at the Alternatives
Sushiswap came under public scrutiny, with some tweets even claiming the protocol had ‘rugged fees.’ Other DAO members stated that this redirection was just to cover salaries, which can be verified by overserving this transaction on Etherscan.
But realistically, this decision was necessary/ the best amongst the worst.
Another way to fund operational expenses would have been to dump SUSHI on the open market at a highly discounted valuation. I think that large sales from the protocol itself could have triggered a loss of faith and begun a death spiral for SUSHI’s valuation.
If the runway elapsed with no fee redirection, the team behind Sushiswap would have disintegrated, and the protocol would have been abandoned, similarly leading to a steep decline in Sushi’s valuation.
If Sushiswap wants talented developers, it must pay a premium, and Sushiswap would struggle to onboard new partners if a solvency issue loomed over the protocol. There was infighting, bad communication, and poor risk management in the treasury holdings and perhaps dubious salaries underlying this issue. However, this proposal, however bitter for the community, seems to have been the most viable option for Sushiswap’s continued survival.
The Dangers of Token Locks
This story serves as a reminder that DeFi, the governance models present, and the financial incentive mechanisms are all still in their teething stages. Locking tokens for increased yield always seems like a no-brainer, especially in bullish market sentiment, until it is not. I am confident that many xSUSHI holders who staked their tokens from anywhere from 1 month to 4 years will think deliberately before locking assets again.
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