First Release | SushiSwap is about to face a $880 million market crash. Can it get through it smoothly?

Key Points

• A large number of SUSHI tokens will be released starting from the end of April

• The SushiSwap community is discussing whether the token release should go ahead

The community of decentralized exchange (DEX) SushiSwap is struggling with the upcoming release of about 47 million tokens ($880 million) that will be released starting in late April. The concern is that if the tokens are suddenly dumped on the market, the project's token (which has a market value of only $2.3 billion) could be crushed.

But on the other hand, if SushiSwap does not release tokens (the code shows that DEX has the ability to do so), it will be a slap in the face for the early builders of the project. Scott Lewis, co-founder of DeFi Pulse, said, "If they require protocol participants to earn the money they already owe, it will cause Sushi's reputation to be greatly reduced."

what is going on?

Launched on August 28, 2020, SushiSwap is an Ethereum-based decentralized exchange (DEX) that allows people to trade tokens directly with others without having to interact with centralized exchanges or other third parties.

Anyone holding the native governance token SUSHI can stake, which means locking up the token for 6 months in exchange for rewards. The rewards are in the form of XSUSHI tokens, which receive transaction fees from exchanges, and holders can also have governance rights and vote on changes to the network.

In October, yield aggregator Harvest Finance (which uses users’ collateral to invest in the DeFi token with the highest yield) began to support SUSHI, allowing its thousands of users to obtain SUSHI returns. Later, other protocols including Pickle Finance followed suit.

Starting around the end of April, 47 million SUSHI tokens ($878 million) will reach the end of their 6-month lock-up period, at which time they should be unlocked, with Harvest Finance accounting for 5%-6%.

Changing release schedule

On January 28, Lukas Witpeerd, a member of the SushiSwap community, raised the question of unlocking tokens, sparking a discussion on how to distribute tokens. One option is to airdrop all the tokens at once, while another option is to allow claims to be made on a weekly basis, which would increase the transaction fees for claims.

SushiSwap token holders voted for the second option (65% support), which is a slower way to distribute funds.

SushiSwap voting results, the approval rate is only 66%

But then SushiSwap’s code was modified to prevent yield aggregators like Harvest Finance from receiving SUSHI. On March 4, Witpeerd pushed a change to SushiSwap’s code that continued to allow individual wallet owners to claim their SUSHI, while anyone who interacted with the project through smart contracts would not receive tokens. That is, Harvest Finance users would not receive any tokens.

On March 10, a SushiSwap community member known as "Blakells" announced the reason for doing so. The move was to protect the protocol "from 'parasitic mining', who have only one purpose: to dump SUSHI to buy back their own tokens in order to drive up the price of their own tokens."

The concern here is that rival protocols that have hoarded a large amount of SUSHI may immediately sell it off to buy back their own native tokens. This can both drive down the price of SUSHI and drive up the price of their own tokens.

Blakells proposed a plan where all protocols that could receive SUSHI would have to give the SushiSwap community a plan on how they planned to use the funds. He launched a vote for them to choose: stick with the plan (allowing projects to claim tokens indefinitely) or set a time window. Respondents supported the original idea, but there was no option to reject the entire plan.

Only 76 people voted, source: SushiSwap forum

So far, both Pickle Finance and Harvest Finance have submitted proposals. Harvest plans to distribute funds over a three-year period (a long time in DeFi). Pickle plans to continue staking once it receives SUSHI, and to do so "forever" (meaning, a particularly long time in DeFi).

Community Criticism

The proposal has come under fire for a number of reasons. First, one commenter wondered when a vote had been taken to exclude protocols that use smart contracts from the allocation, and there didn’t appear to be one on the SushiSwap forum. Another added that there didn’t appear to be a governance vote behind the decision, “I hope this gets corrected. Frankly, it’s a rip-off.”

Another issue is that SushiSwap changed the way the tokens were distributed after the agreed lockup period of 5 months. The problem is that when the release schedule was announced, it was not posted on the chain. This means that the funds were not automatically released to relevant parties such as Harvest or Pickle, but had to be manually operated by the team. With this control, they were able to decide how the funds were distributed, or whether they should be distributed at all.

“Since we didn’t create the contract, we have full control over SUSHI right now, but we should do what we say,” wrote a SushiSwap community member named “BoringCrypto,” adding that “changing the rules after the fact feels like a ‘breach of contract’ to me.”

Another agreed, saying, “Reputation is everything, and given all the drama we’ve experienced over the past few months, I think it’s wise to do our best to be good crypto citizens.” The drama he was referring to included SushiSwap’s anonymous creator cashing out $10 million in SUSHI tokens for Ethereum-only, handing control of the exchange to other developers, including FTX founder Sam Bankman-Fried, and then ultimately handing the funds back.

If SushiSwap was able to survive such a thrilling incident, the community will also hope that it can smoothly survive this relatively minor dispute.

This article is translated from Decrypt, original text: https://decrypt.co/62522/defi-exchange-sushiswap-faces-an-880-million-dilemma