What the Fork? Sushi, Uni, & the Impact of DAO Governance
When protocols differ little from a technical perspective, what can we learn from the impact of governance processes on their evolution?
Throughout time, humanity has been fascinated by twins. From Rumulus and Remus to Jacob and Esau, ancient mythology and religion are filled with stories of competing, identical siblings. These pairs prompt the philosophical debate of nature versus nurture, which continues to captivate people to this day.
In crypto, we have our own version of a twin heavyweight fight — Uniswap vs SushiSwap. These DeFi protocols started as nearly identical source code, but have since evolved under the guidance of their respective communities. Their distinct governance structures and processes form the rails on which each community determines the future of its underlying protocol. To understand the impact of these decisions, let’s take a deep dive into the history and evolution of governance for these two technically similar protocols.
Brief History of Uniswap and SushiSwap
Most crypto veterans will be familiar with the Uniswap-SushiSwap saga but for those newer to the space, read on — it’s worth it.
It was August 2020 and DeFi Summer was in full swing. Kicked off by Compound in June, DeFi protocols had finally solved the problem of bootstrapping early liquidity through protocol token rewards. DeFi had previously suffered from an incentive problem — early liquidity providers (LPs) earned little in transaction fees since traders avoided illiquid pools due to high slippage. Compound flipped this dynamic on its head by offering its own governance token to LPs, simultaneously rewarding early users and handing control of the protocol over to the community. This incentive design sparked a revolution — early LPs could now be compensated for providing liquidity to smaller pools through higher APY and a voice in the future of the project. New protocol token rewards quickly kicked off a frenzied wave of liquidity mining that drove DeFi TVL from $1B in June to $15B in October.
Uniswap enjoyed the knock-on effects of a flood of new DeFi users, seeing its TVL rise from $70M in June to $300M in late August. The open-source protocol, one of the first exchanges to use the automated market-making (AMM) model, had secured a dominant position among DEXs and sizable backing from top VC firms that June. Perhaps due to conflicting interests from new investors, Uniswap did not release a governance token or change its incentive structure in response to the emerging paradigm. The inaction created an opportunity which Chef Nomi, anonymous founder of SushiSwap, quickly jumped on (coincidentally, just a few days after the Director of Research at The Block tweeted the below)
Nomi forked Uniswap to create SushiSwap by copying the source code and deploying it to new Sushi contracts on Ethereum. The nearly identical code base boasted two key new features — a governance token and updated staking rewards. On SushiSwap, users could earn its governance token — SUSHI — by providing liquidity to pools. Crucially though, this liquidity had to come in the form of Uniswap LP tokens. Incentivized by massive Sushi rewards (1,000 minted per block in the 1st 2 weeks!), users rushed to Uniswap to deposit assets in eligible pools in return for Uniswap LP tokens, which they promptly staked in SushiSwap contracts. Uniswap’s TVL rapidly increased from $300M to $1.8B.
Two weeks after launch, SushiSwap kicked off the Liquidity Migration, taking all Uniswap LP tokens on SushiSwap, redeeming them on Uniswap for the respective token pairs, and initializing new SushiSwap liquidity pools with the tokens. By the time the migration was over, SushiSwap had gained $810 million worth of tokens — roughly 55% of Uniswap’s liquidity.
The liquidity siphoning — now dubbed a vampire attack — was a landmark event in DeFi which highlighted the importance of community-protocol incentive alignment and community-owned governance. The event put pressure on projects across the space to introduce governance tokens and cede control of their protocols to their communities. That September, Uniswap released its own governance token, UNI, to rally community engagement and quickly saw its TVL rebound to over $3B in two months.
Today, Uniswap and SushiSwap are still guided by their respective communities. Incentive adjustments, new product rollouts, partnerships, and other developments have been proposed, voted on, and executed by a community aligned with the growth and mission of the protocol. Despite their initial technical similarities, these two communities have developed different ways of conducting governance that have enabled them to reach their goals in a decentralized manner.
Early Days of Governance
SushiSwap’s immediate foray into decentralized governance, just weeks after the project’s inception, proved rocky. One day before the migration, Nomi absconded with the $13M developer fund only to return it less than one week later and hand the keys of the project over to Sam Bankman-Fried, founder of FTX. SBF successfully managed the migration before handing the keys back to the community.
In the year after, SushiSwap was marred with internal conflict, disputes over compensation, and accusations of corruption which led to the departure of many core contributors, including CTO Joseph Delong. Critics argued that SushiSwap’s inability to manage internal strife highlighted the limitations of DAOs in running competitive businesses. Ultimately, the community found a middle ground, passing a restructuring proposal that established a more traditional organizational structure with continued oversight by the community.
Uniswap, which had operated for over two years when governance launched, was professionally managed from the start. Due to the early distribution of voting power, the founders’, core team members’, and investors’ roles in guiding the now community-led protocol remained largely unchanged, which may have played a crucial factor in this success.
Launch and Voting Power Distribution
SushiSwap governance started as a fair launch, with 90% of tokens distributed to the public and only 10% kept in the treasury. Uniswap, which was VC-backed at the time, distributed only 60% of tokens to the community, with 21.5% allocated to the team and 17.8% to investors.
Today, we can see the ramifications of this genesis allocation in the voting power distribution. SUSHI votes are more dispersed throughout the community. See a comparison of voting power buckets below:
Here are some highlights:
- 75% of the SUSHI voting power is held across 100 wallets compared to just 24 wallets for Uniswap
- 90% of the SUSHI voting power is held across nearly 450 wallets compared to only 40 for Uniswap
- Sub-1M wallets hold 41.5% of the SUSHI voting power vs only 5.3% for Uniswap
The distribution of initial token allocations have lasting effects on the dispersion of voting power. On-chain and off-chain governance processes, which we explore later in the article, also contribute to differences in centralization of power.
Voting Eligibility
Who is eligible to participate in governance?
For Uniswap, all UNI holders must delegate their tokens on the Uniswap voting dashboard to enact their voting power. Tokens can be self-delegated or delegated to a trusted party’s address with a conversion ratio of 1 UNI = 1 vote. However, tokens must be delegated either entirely before a proposal has been submitted or during the proposal delay period (one block, or ~15 seconds) to be used in voting.
SushiSwap’s voting metric is SUSHIPOWAH, which is gained in multiple ways:
- Providing SUSHI-ETH liquidity
- Staking SUSHI (xSUSHI)
- Depositing SUSHI into Tokemak
SUSHI-ETH LP providers receive 2 SUSHIPOWAH per SUSHI deposited in the pool, while stakers and Tokemak depositors receive 1 SUSHIPOWAH per SUSHI. To be an eligible voter, holders must have SUSHIPOWAH from any or all of the 3 above options at the time of the vote being started.
You will immediately notice one significant difference in eligibility requirements. SushiSwap aligns participation in governance with growth of specific aspects (e.g. liquidity) of the protocol. What does this mean for eligibility in the context of circulating token supply? Interestingly, ~28% of circulating UNI (201.5M of 719.4M) and ~37.5% of circulating SUSHI (90.2M of 241.2M) is eligible to be used in governance. UNI holders, however, must actively delegate their tokens to be eligible to vote, which may mean these holders are more likely to participate in governance. Eligible SUSHI holders may be more interested in receiving additional yield through staking than leveraging the associated governance rights.
When we look at the last 10 proposals, we can see this theory play out in the data. The graph below on the left shows that, on average, 32% of eligible UNI votes were used in governance vs 7% for SUSHI votes.
In the graph on the right, we see a comparison of total # of voters for UNI, on both voting platforms, and SUSHI. The data is a mixed bag — on average, more voters (552 vs 353) participate in final proposals (which occur on Snapshot for Sushi and On-Chain for UNI) for SUSHI than UNI. However, UNI Snapshot proposals, a preliminary step in the proposal process, draws more participation. This discrepancy may be the result of the cost to vote on-chain vs off-chain, which we explore later.
On-chain vs Off-chain Governance
Uniswap governance occurs on-chain while SushiSwap governance occurs off-chain via Snapshot. Since Uniswap’s proposals are voted on and executed on-chain, the governance process is more rigorous.
Uniswap proposals begin with a Temperature Check to determine if there is sufficient buy-in from the community to change the status quo. Any community member can submit a proposal for a Temperature Check, which is posted on a Discourse-hosted forum for discussion and voted off-chain via Snapshot. Proposals must achieve a majority vote with a 25k UNI yes-vote threshold to move to the next phase.
If this threshold is met, proposals move on to a Consensus Check, which establishes formal discussion around a potential proposal. Using feedback from the Temperature Check, members resubmit an updated proposal to the governance forum and a new Snapshot poll. A 50k UNI yes-vote quorum over the course of 5 days is required for the Consensus Check to pass.
The Governance On-chain Proposal is the final step of the governance process. Since these final proposals and voting occur on-chain, executable code must be written and audited for these proposals to be submitted to the Governance Portal. Proposers must have 2.5M UNI delegated to their address to submit proposals. In order for a vote to pass, it must achieve a quorum of 4% of all UNI (40M) voting in the affirmative over the course of 7 days. If the proposal passes successfully, a two-day time lock will follow before the proposed code is executed.
The SushiSwap governance process is less formal. Any community member can submit a proposal to the SushiSwap forum for an open discussion amongst community members and usually a poll to measure sentiment. Guidelines for proceeding to the next phase are less well-defined. If the proposer feels that community sentiment around the proposal warrants advance to the next phase, a formal proposal (and code changes if necessary) is posted to Snapshot. 200k SUSHIPOWAH is required to propose a vote on Snapshot. Over a 7 day voting period, a quorum of 5M SUSHIPOWAH in favor is required for the proposal to pass.
The process can be summarized as follows:
Since voting occurs off-chain, implementation is managed by the core teams via multisig. Any use of the devfund wallet requires 3 out of 6 signatures from the devfund team for a transaction to be approved. Any changes that are within the purview of the core team, such as rebalancing and administration of farming pools and use of the growth fund, must pass the Operations Multisig with at least 3 signatures.
Immediately, we notice a significant difference in quorum requirements. Of the 90M eligible SUSHI votes, 5M, or 5.5%, is required to pass a proposal while 40M, or 12.5% of the eligible UNI votes is required. Remember the differences in eligibility and voter participation? UNI requires holders to intentionally delegate to participate in governance, while SUSHI holders may become eligible for a variety of non-governance related reasons (e.g. staking for additional yield). The result is a higher participation rate amongst eligible voters, which allows for higher quorum thresholds.
The decision to implement on-chain vs off-chain governance has a few notable effects. SushiSwap proposals are ultimately implemented at the discretion of the multisig holders, which means the impact of a bad faith proposal passing is limited. Therefore, proposal thresholds can safely be lower, allowing more of the community to be eligible to draft and submit. In fact, ~90 SUSHI members are eligible to submit proposals vs just 35 for Uniswap. Additionally, Uniswap’s on-chain process requires certain safety mechanisms to be implemented to prevent bad faith governance, including:
- Timelock delay: All governance and other administrative actions are required to sit in the Timelock for a minimum of 2 days, after which they can be implemented. Since UNI is a freely tradable asset, anyone can attempt a governance takeover via market buying. If a group did achieve a bad faith takeover, the Timelock delay would give affected parties time to withdraw their assets from the protocol. This would also be an opportunity to fork the protocol, a path that would likely be taken by the remaining good-faith actors.
- Delegated balance check on previous block: The balance check for the 2.5M UNI required to submit a vote is set exactly one block in the past. This prevents unfinished transactions (that span multiple blocks) from effecting the voting process.
Both SushiSwap and Uniswap require voting power (e.g. delegation or SUSHIPOWAH requirements) to be owned prior to proposal submission. This requirement prevents bad faith actors from opportunistically purchasing assets and swaying the vote.
There’s also a cost difference: on-chain voting is more expensive due to transaction fees, while Snapshot voting is free. On-chain voting further decreases participation from smaller wallets and often leads to higher delegation rates, which may result in greater centralization of voting power.
Cultural Differences
Differences in governance often evolve as a reflection of the community that forms around a project. Greater distribution of power and less stringent participation requirements usually reflect a community that welcomes newcomers and prioritizes relationship building. Fittingly, the SushiSwap discord and governance forums feel less formal, younger, and more fun.
In contrast, the centralization of power, expensive on-chain voting, and rigorous proposal process of Uniswap creates an environment that feels more institutional and professional. For newcomers, it may seem impossible to get involved and have an impact. However, this difference is not necessarily a bad thing — Uniswap has become the blueprint for protocols looking to maximize efficiency and optimize decision-making.
Measuring Success
Despite the early success of SushiSwap, Uniswap continues to dominate the DEX rankings in TVL, volume, and number of traders. Uniswap launches updated products (v3) and new user experiences with tremendous efficiency and with few hiccups. Regardless of the critiques, the governance model — which functions more as an oligarchy than a true democracy — has proven remarkably successful.
SushiSwap took the hard route. While the anarchist early days have been slowly replaced with a governance system that resembles a democratic republic, the community’s commitment to decentralization remains. For the outsider, you can get involved in SUSHI governance and have an impact — regardless of success metrics, that should be applauded. Let’s look at a few takeaways from our comparison:
- Governance Launch — It is difficult to ever achieve equal distribution of voting power without a fair launch. Uniswap’s initial 40% distribution has had lasting impacts on distribution — the top 10 voters (many of whom are investors or advisors) hold 46% of the voting power today. Sushi is more evenly distributed, but not by much, with 29% held by top 10 wallets. Clearly a challenging problem to solve
- Voter Eligibility: SushiSwap’s eligibility requirements may incentivize growth of protocol (those who want to participate in governance must stake or provide liquidity) but they artificially inflate the number of eligible voters and decrease participation. Uniswap’s requirement of delegation to vote results in higher eligible vote participation (32% vs 7%)
- On-chain vs Off-chain: On-chain proposals decrease participation (Uniswap off-chain proposals drew 250% more voter participation than final on-chain proposals) and require higher thresholds (for proposing and passing) due to the stakes
In reality, decisions on governance structure, like degrees of decentralization, always come with tradeoffs. For projects looking to develop decentralized governance, it is critical to evaluate the impact that these tradeoffs will have on the future of your project and the community that forms around it.
