The SushiSwap token sale proposal raises community concerns and may become a classic case of DeFi governance

This article is an original piece by Chain Catcher, authored by Gong Quanyu.

Regardless of the final outcome of the proposal, the SushiSwap token sale proposal has become one of the most thoroughly discussed proposals in the crypto community. Community members have exerted massive pressure, forcing the project team to modify the details of the proposal, while venture capital firms planning to participate have publicly stated their philosophies and strategic values to align with the community, potentially becoming one of the most classic cases in DeFi governance history.

On July 8, SushiSwap co-founder 0xMaki published a proposal on the official governance forum, suggesting that as part of the treasury diversification plan, a portion of the approximately 51 million SUSHI currently held by the SushiSwap treasury be allocated for institutional investors, with a maximum sale size of $60 million, and a sale price set at 20-30% of the time-weighted average price over the 30 days prior to the proposal's conclusion, with terms including a 6-month lock-up period and an 18-month linear release period.

Token Sale Price Setting

Currently, most of the assets held by the SushiSwap treasury are SUSHI, valued at over $300 million. This proposal aims to diversify the treasury assets and strengthen strategic partnerships with crypto venture capital firms.

The proposal also revealed that confirmed strategic investors include 21 firms such as Lightspeed Venture Partners, Spartan, Dragonfly Capital, Polychain, Blockchain.com, Pantera Capital, 3AC, DeFiance, Parafi, Hashed, Multicoin Capital, Coinfund, and CMS Holding.

However, due to the recent poor performance of the SUSHI token and the inappropriate details of the sale plan, the proposal has sparked significant skepticism within the SushiSwap community, with over 80% of replies opposing the proposal.

In response, many crypto venture capital firms, including Lightspeed Venture Partners, Pantera Capital, and DeFiance Capital, provided explanations to the criticisms below the proposal post, while non-direct participants such as FTX founder SBF, Arca Capital partners, and UMA protocol developers also joined the discussion on the topic.

Currently, the number of replies to the proposal on the SushiSwap governance forum has reached 201, making it the most discussed proposal in the project's history. The controversies surrounding this proposal can be summarized into five main points.

One point of contention is that the SushiSwap treasury is well-funded, with annual operating expenses below $1 million, and does not need to conduct such a large-scale token sale. A user named "GreenEyes" pointed out, "Sushi should not be raising funds and starting a diversification plan right now; its current income is sufficient to cover all operating expenses. As DeFi regains strong traction in public market valuations, the fundamentals of SUSHI continue to improve, and with new protocol upgrades running smoothly, we can sell tokens in small amounts multiple times during the upward trend, or even just start diversifying investments and utilize the treasury internally."

In response to this topic, 0xMaki stated that the main purpose of the token sale is to establish more strategic partnerships, indicating that these partners can act as advocates for their portfolio, promoting projects with yet-to-be-issued tokens on Miso and essentially integrating with the Sushi ecosystem.

The second point of contention is that the 20-30% discount price is too high, further harming the interests of SUSHI holders in light of the recent sharp decline in SUSHI prices. Arca Capital partner Jeff Dorman stated that SUSHI is currently trading below its fair value, and now is absolutely not the time to sell.

"Given the vibrant community, the project's fundamentals, and the strong interest from 'strategic' investors in financing, the demand for SUSHI tokens in the market is clearly strong. If investors are so optimistic about the future of Sushiswap, they should buy SUSHI, forgo the discount, and add the claimed 'strategic value,'" Jeff Dorman said.

In response, Pantera Capital's portfolio development director Franklin Bi stated that if the Sushi team were to sell all the SUSHI planned for sale at market price on DEX, there would be about a 30% slippage impact, while this transaction allows the team to immediately obtain $60 million in liquidity at a 20-30% discount, with a 2-year restriction period, thus the discount price is still fair.

However, many SushiSwap community members did not accept this response, as the SUSHI/ETH trading pair that Franklin Bi actually cited only accounts for a small portion of SUSHI's overall liquidity, making it unrepresentative and unconvincing.

The third point of contention is that the nearly 2-year linear unlock period is still too short; if these institutions are optimistic about Sushi's long-term potential, a longer unlock period should be set. According to a vote initiated by 0xMaki, 60% of community users believe it should be set to a four-year unlock period.

Source: SushiSwap Governance Forum

Additionally, several community members suggested that tokens should be sold in the form of options, meaning that venture capital firms can only unlock their tokens when the SUSHI price reaches a specific level. SBF also stated on Twitter that he believes selling at market price + increasing the exercise price to $12 with a 5-year term for a 1:1 option is the right move.

The synthetic asset protocol UMA also proposed a new token financing scheme called Success Token, which combines the project's own tokens with call options for those tokens, meaning that the project team provides call options to investors instead of offering discounted token sales. The call option portion only becomes valuable after the project token price increases, thus setting a more reasonable incentive mechanism: investors can only receive their "bonus" if the project performs well.

The fourth point of contention is that the number of venture capital firms participating in this transaction is too large, which does not actually bring enough strategic value, or that the strategic value and value-added services they provide are all similar. A user named "klemperer-the-goat" pointed out, "If the purpose of the sale is for strategic partners rather than raising funds, then adding 21 funds is absurd. Many of these funds know each other and are well-known funds focused on cryptocurrency; do the value additions they bring really differ from each other?"

Most community members share this concern and believe that 3-5 major venture capital firms should participate, and the firms willing to engage in the transaction should publicly state the strategic value and specific contributions they can bring to Sushi before making a final selection. "I would ask each investor to commit to at least writing one public post/tweet, etc., every quarter for the next 4 years: a) updating the general audience about Sushi; b) a list of what they are doing/helping with," SBF tweeted.

Below the proposal post, several venture capital firms also responded to public opinion. For example, Amy Wu, a partner at the well-known venture capital firm Lightspeed Venture Partners, replied that from the perspectives of product, vision, and execution, Sushi is one of the top teams in the DeFi industry, and thus hopes to establish a long-term relationship with the Sushi team and community. The firm can introduce various fintech products and new banks to the Sushi team and community, expanding Sushi's network beyond the crypto industry while assisting Sushi in recruitment, public relations, marketing, and business development.

Pantera Capital's portfolio development director Franklin Bi introduced the firm's history and philosophy in a reply, stating that the firm can help Sushi in recruitment, portfolio/industry connectivity, technology/market research, marketing, resources/suppliers, and more.

Future Fund also replied that the firm is one of the early investors in SushiSwap and previously purchased the sushi.com domain name and gifted it to the project.

The fifth point of contention is that some of the venture capital firms listed in the proposal are even harming the Sushi community. Some community members pointed out based on Etherscan data that 3AC and DeFiance, while planning to participate in the transaction, recently sold nearly a million SUSHI on DEX and Binance, making them unqualified to be strategic supporters of Sushi. "This looks more like arbitrage trading rather than a strategic long-term investment," Jeff Dorman stated.

Source: Etherscan

DeFiance Capital partner Wangarian responded by stating that DeFiance is an early supporter of Sushi and currently one of the largest holders of SUSHI, but as a crypto investment fund holding liquid positions, "our work requires us not only to buy tokens but also to occasionally sell them. We believe there is no need to explain every action we take to the public."

Wangarian also stated that DeFiance will not participate in this financing to eliminate any concerns about conflicts of interest. "We hope the Sushi community recognizes the benefits of a large treasury valued in stablecoins, which will provide meaningful financial firepower for the SushiSwap team in the coming years."

In addition to the aforementioned concerns, the recent incident where the DeFi Education Fund quickly sold off 1 million UNI after obtaining it through a Uniswap community vote has also led some SushiSwap users to reflect, worrying that venture capital firms are abusing governance for their own interests.

"After the UNI Education Fund, we received this proposal in such a short time. I want to say this is not a coincidence; venture capital funds realize they can abuse governance for their own purposes. Just open a governance proposal and make it look legitimate, and VCs can use their large SUSHI holdings to vote for every ballot," a user named "Wunderbernd" replied, "There is no mechanism to ensure that VCs truly fulfill their commitments. They can obtain SUSHI at a discount without being forced to do anything.

This is again similar to the DeFi Education Fund; they got the money, and they can do whatever they want."

On July 16, 0xMaki replied in the proposal post that based on the overall community response, the transaction size would be reduced from $60 million to $15-20 million, while initiating multiple votes regarding the details of the token sale.

"It is rare to see this level of interaction between institutions and community governance, and how these institutions interact with DAOs through open discussions at critical moments," 0xMaki also commented on the significance of this event.

Perhaps influenced by the community's activity, today the price of the SUSHI token rose by about 16% amid a general market decline, reaching a price of $7.04 at the time of publication, but still down about 68% from its peak earlier in the year.

Currently, discussions regarding this proposal are still ongoing, with many industry figures such as Uniswap founder Hayden Adams, Compound founder Robert Leshner, YFI founder Andre Cronje, Messari founder Ryan Selkis, and BlockTower Capital founder Ari Paul discussing the matter on Twitter.

Regardless of the final outcome of the proposal, the SushiSwap token sale proposal has become one of the most thoroughly discussed proposals in the crypto community, with community members exerting massive pressure to force the project team to modify the proposal details, and the venture capital firms involved publicly presenting their philosophies and strategic values to align with the community, potentially becoming one of the most classic cases in DeFi governance history.

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