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Sushiswap (SUSHI) Treasury Raise: Proof Decentralized Governance Works

Jeff Dorman, CFA
Aug 17, 2021
Those not watching the digital assets market closely may have missed one of the most important events to happen in the young history of digital assets, and the even younger history of Decentralized Finance (DeFi): true and effective protocol governance.
 
This past month, one of the leading decentralized exchanges, Sushiswap, demonstrated decentralized governance working exactly as it was intended. Sushiswap was seeking to raise capital from more traditional institutional venture investors by selling a portion of SUSHI tokens held in its treasury. Interestingly, no deal was ever consummated; however, we believe this was not only the correct decision by the Sushiswap community, but also a case study in successful governance. We at Arca are thrilled to have been a part of both history and the future of decentralized governance.
 
First, some background:
Sushiswap…
 
While Sushiswap the protocol is decentralized, there is a passionate group of external and independent developers and entrepreneurs who work exclusively on developing the protocol, much like Bitcoin, Ethereum and other decentralized protocols. These individuals serve as an unofficial “management team” and are collectively empowered by the governance of the token holders to make day-to-day decisions.   The token holders then serve as their “board of directors,” in that all major decisions, specifically with regard to Sushi’s treasury, need to be approved via governance votes.
 
Sushi’s “management team” recently had a goal of onboarding a few strategic partners while simultaneously converting some of the SUSHI in the “corporate treasury” into dollars to ensure they could continue to fund this project. A few months ago, the management team began exploring a private round of financing (initially soft-marketed as an opportunistic $10-$20mm raise), but it eventually morphed into a potential $60mm PIPE at a 30% discount AFTER the token had already fallen 70% in line with the recent swift market selloff. Needless to say, this deal would have been a bad outcome for everyone other than the handful of investors who were trying to buy the tokens at these depressed levels.
 
Fortunately, decentralized governance protocols provided the Sushiswap community, which includes Arca as both a token holder and customer, the ability to voice significant concern that this deal was not only value destroying, but unnecessary. In fact, decentralized governance affords token holders the right to submit proposals about the direction and development of projects. Arca offered its own counterproposal, which could have saved Sushiswap $22mm while significantly reducing token dilution. Our proposal helped highlight the flaws in the original deal, leading to passionate responses by the community- the quantity and quality of these responses being nothing short of amazing.
 
In response to the community comments, the SUSHI team continued to reach out to a few strategic partners, seeking to create a new deal that benefitted all parties involved - the SUSHI team, investors, and token holders. One of the VCs in the original deal, Lightspeed Ventures, created a new proposal after absorbing all of the community comments, which not only provided a non-dilutive price for tokens, but offered the community the same opportunity to participate as the VCs . Arca voiced its support for this new, compromised outcome. Since the SUSHI team originally wanted to raise from VCs in order to receive the strategic help they needed to scale their business, both Arca and Lightspeed explicitly outlined the “value add” we intended to provide to the SUSHI team, and the community asked any other institutional partners who wanted to be part of the deal to do the same.
 
A prolonged comment period ensued, with multiple public community calls (including an AMA with the Arca, Lightspeed Ventures, and Sushi team with over 400 in attendance) aiming towards finding an outcome that could be brought to a public vote. Keep in mind, this was all done for a project that has never raised a dime of outside capital and has no CEO and no board of directors. Additionally, the ad hoc “token holder relations department” of Sushiswap management deserves praise for how they managed to coordinate such a large and diverse opinion set. Over the past month there were:

  • 362 comments on the public governance board
  • Six public community calls all hosting 400-500 community members each
  • Countless tweets and news articles leading to the raise being the most discussed governance proposal to date.
Ultimately, the decision was made to shelve the deal for now as the community continues to work towards a solution that can be brought to a decentralized vote. We can also use this opportunity to observe why this particular deal was shelved, as it likely will ultimately pave a way forward via regulation.
 
Key Takeaways
Proof Decentralization Governance Can Work
While some may see this as a failure in governance because no deal was achieved, we see it differently. Sometimes the best decision is to do nothing at all. The difference is that historically a decision like this would be made by a small group of people in a closed boardroom. Today, a good decision was made with the input of thousands of people in a public forum.
 
We think the events of the past few months demonstrate the power of decentralized governance, working exactly as it should. This is the first step towards a more equal, democratized financial system, every person involved from the passive observer to the active discord member having a voice in this process. This is what we consider to be a successful governance outcome.
 
The SUSHI community collectively stopped a bad outcome from happening (selling tokens at a massive discount where only a few institutional members would benefit at the expense of all other token holders) and still managed to achieve the goals of Sushiswap (to onboard and engage new and important strategic investors, all of whom are now helping Sushiswap with legal, marketing, development, fundraising and other important needs of management). This, alone, is a huge victory.
 
VCs Need To Step Up
For the past decade, the power dynamic between founders and investors has been off balance, with power being skewed heavily in favor of venture capital investors where most of the efforts of the company are centered around maximizing the investors’ profits, rather than the long-term success of the business. Founders are not just looking for a pile of cash and a name to put in media materials, but are looking for strategic investors that can provide the guidance, knowledge, and resources to help scale their businesses. This is even more true for founders in digital assets who are creating technologies in a fast-changing environment with little regulatory clarity. Founders in the digital assets space need help getting mainstream adoption, navigating the inevitable regulation, and finding a way to play nicely within the current financial system that’s not likely to be upended anytime in the near future. Digital assets offer alternative ways to raise large sums of capital without having to go to a VC. So if VCs want to stay relevant, they need to step up and provide the strategic help founders desperately want, otherwise these projects are going to find alternative ways to fundraise.
 
Additionally, with a new paradigm of token holders and decentralized governance, VCs will need to change their methods to always get the community on board and to have fundraises that democratically involve them. We believe that an economically-incentivized community catalyzes an engaged community, which leads to a bigger pie and more value for investors and the community alike - and we expect smart VCs to push towards that.
 
Anecdotally, we’re hearing from Arca limited partner investors that many venture capital firms are also now making changes due to the Sushiswap events and are thinking about how they can truly demonstrate their value-add to projects beyond just buying tokens at a discount and locking them up for 7+ years.
 
Token Holders Have A Voice
Arca has been a long-time advocate for public governance and transparency. Last year, with Gnosis, we highlighted the mismanagement of their treasury and advocated for money to be returned to their token holders. Though our original ask did not happen, it did result in Gnosis transferring their treasury into a DAO, which increased both transparency and voting rights. We have shown that token holders have a voice and are part of the checks and balances system. It is our job to hold projects accountable, and in the case of Sushiswap, flag potentially damaging outcomes.
 
From a wider perspective, digital asset community members need to continue to speak up. The recent congressional debate over a new infrastructure bill in the United States is showing how traditional “backdoor governance” continues to fail society. And the small but important crypto amendment within the bill has sparked an enormous volume of comments and interest from the digital assets community. This community has proven itself to mobilize quickly, and work together, to solve problems, which may be the true superpower of digital assets.
 
Compromise, Compromise, Compromise
Governance is not about getting everyone to agree. It is about compromise. To build a fairer financial system, one cohort of stakeholders can’t unilaterally win more than the others. So while the outcomes for Gnosis and Sushiswap ended differently than originally planned, the fact that change was catalyzed by token holders shows that with more involvement, more discussion, and more compromise, we can finally get to a better financial future.
 
Remember, this is just the beginning - this ecosystem is in its infancy, and with more and more “case studies” like this, we’ll become a better, stronger, and ultimately, fairer, ecosystem.

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