Understand the governance history and evolution of Uniswap and SushiSwap

Uniswap and SushiSwap, with almost identical source codes, have continued to evolve under the guidance of their respective communities, forming different governance structures.

In the crypto space, we have a heavyweight matchup – Uniswap vs SushiSwap. These DeFi protocols started out with almost identical source code, but have since evolved under the guidance of their respective communities. Their different governance structures and processes frame each community’s trajectory in determining the future of its underlying protocol. To understand the impact of these decisions, let’s delve into the governance history and evolution of these two technically similar protocols.

A Brief History of Uniswap and SushiSwap

Most crypto veterans are familiar with the Uniswap and SushiSwap saga.

It was August 2020, and DeFi Summer was in full swing. In June, the DeFi protocol launched by Compound finally solved the problem of bootstrapping early liquidity. DeFi has previously faced incentive issues – early liquidity providers (LPs) earn very little transaction fees as traders avoid illiquid pools due to high slippage.

Compound tries to solve the problem by offering its own governance tokens to LPs, while rewarding early adopters and handing over control of the protocol to the community. This incentive design has caused a revolution – early LPs can provide liquidity to smaller capital pools by increasing APY, and have a say in the future of the project, and get compensated for it. The new protocol token rewards quickly fueled a frenzy of liquidity mining, increasing DeFi’s TVL from $1 billion in June to $15 billion in October.

Uniswap has benefited from the influx of new DeFi users, with its TVL growing from $70 million in June to $300 million at the end of August. The open-source protocol was one of the first exchanges to use an automated market-making (AMM) model, rising to DEX dominance in June of that year and garnering massive backing from top VCs. Perhaps due to the conflict of interest of new investors, Uniswap has not released a governance token or changed its incentive structure to address the emerging paradigm. This inaction created an opportunity that Nomi, the anonymous founder of SushiSwap, was quick to jump at (coincidentally, The Block’s research director tweeted the following just a few days ago).

Understand the governance history and evolution of Uniswap and SushiSwap

Nomi forked Uniswap to create SushiSwap by copying the source code and deploying it to a new Sushi contract on Ethereum. Nearly the same codebase, but with two key new features – governance tokens and updated staking rewards. On SushiSwap, users can earn their governance token SUSHI by providing liquidity to the pool. But most critically, this liquidity must come in the form of Uniswap LP tokens. Incentivized by massive Sushi rewards (1000 rewards per block for the first two weeks!), users are rushing to Uniswap, depositing assets in eligible pools in exchange for Uniswap LP tokens, and quickly transferring these Tokens are put into the SushiSwap contract. Uniswap’s TVL has grown rapidly from $300 million to $1.8 billion.

Two weeks after its launch, SushiSwap initiated liquidity migration, transferring all Uniswap LP tokens to SushiSwap, exchanging the corresponding token pairs on Uniswap, and using the tokens to initialize the new SushiSwap liquidity pool. By the time the migration was over, SushiSwap had acquired tokens worth $810 million, or about 55% of Uniswap’s liquidity.

Liquidity siphoning — now known as the “vampire attack” — is a DeFi milestone that underscores the importance of community agreement incentivizing coordination and community-owned governance. The event has put pressure on projects in all fields to introduce governance tokens and hand over control of their protocols to the community. In September of the same year, Uniswap released its own governance token, UNI, to enhance community participation.

Today, Uniswap and SushiSwap are still guided by their respective communities. Adjustments to incentives, new product launches, partnerships and other developments are proposed, voted on and executed by the community. Despite their initial technical similarities, the two communities have developed different governance styles that allow them to achieve their goals in a decentralized manner.

early governance

A few weeks after the project launched, SushiSwap immediately tried decentralization, but it didn’t work out well. The day before the migration, Nomi absconded with $13 million in dev funds, returned it less than a week later, and handed over the project keys to FTX founder Sam Bankman-Freed ( Sam Bankman-Fried). SBF successfully managed the migration before handing the keys back to the community.

The following year, SushiSwap was embroiled in internal conflict, compensation disputes and corruption allegations that led to the departure of many of its core contributors, including CTO Joseph Delong. Critics argue that SushiSwap’s ineptitude in managing internal conflicts highlights the limitations of DAOs in running competing businesses. Ultimately, the community passed a reorganization proposal that established a more traditional organizational structure with continued community oversight.

Uniswap has been running for over two years at the time of governance launch and has been professionally managed from the start. The roles of founders, core team members, and investors in guiding the now-community have remained largely unchanged due to the early distribution of voting rights, which may have been a key factor in this success.

Initiation and Voting Rights Allocation

SushiSwap governance starts with a fair launch, with 90% of tokens distributed to the public and only 10% kept in the vault. At the time, the venture-backed Uniswap company distributed only 60% of its tokens to the community, 21.5% to the team, and 17.8% to investors.

Understand the governance history and evolution of Uniswap and SushiSwap

Today, we can see the impact of this initial distribution in the distribution of voting power. SUSHI’s voting is more dispersed in the community. See the voting power comparison below:

Understand the governance history and evolution of Uniswap and SushiSwap

Here are some highlights:

  • 75% of SUSHI’s voting power comes from 100 wallets, while Uniswap comes from 24 wallets.
  • SUSHI has nearly 450 wallets with 90% voting power, while Uniswap has only 40.
  • Wallets under 1 million have 41.5% of the voting power in SUSHI, while Uniswap has only 5.3%.

The distribution of the initial distribution of tokens has a lasting effect on the dispersion of voting power.

Eligibility to vote

Who is eligible to participate in governance?

For Uniswap, all UNI holders must delegate their tokens on the Uniswap voting panel to exercise their voting rights. Tokens can be delegated on their own or to addresses of trusted parties at a conversion ratio of 1 UNI = 1 vote. However, tokens must be fully delegated prior to proposal submission or during proposal delay (one block, or ~15 seconds) in order to be used in voting.

SushiSwap’s voting indicator is SSHIIPOWAH, which can be obtained in several ways:

  • Provide SUSHI-ETH liquidity
  • Deposit SUSHI to Tokemak

SUSHI-ETH LP providers will receive 2 SSHIIPOWAH for each SUSHI deposited into the pool, while stakers and Tokemak depositors will receive 1 SSHIIPOWAH for each SUSHI. To become an eligible voter, holders must receive SSHIPOWAH from any or all of the 3 options above at the start of voting.

We immediately notice a significant difference in eligibility requirements. Participation in governance in SushiSwap is aligned with the growth of specific aspects of the protocol, such as liquidity. What does this mean for eligibility in the context of circulating token supply? Interestingly, about 28% of circulating UNI and about 37.5% of circulating SUSHI are governance-compliant. However, UNI holders must actively delegate their tokens to be eligible to vote, which may mean that these holders are more likely to participate in governance. Eligible SUSHI holders may be more interested in obtaining additional benefits through staking rather than utilizing the associated governance rights.

When we look at the last 10 proposals, we can see this theory manifest in the data. The chart on the left below shows that, on average, 32% of UNI votes are used for governance, while only 7% of SUSHI’s votes are used for governance.

In the chart on the right, we can see a comparison of the total voter turnout of UNI and SUSHI on the two voting platforms. The data is mixed — on average, more voters participated in the final proposal of SUSHI than UNI. However, the UNI Snapshot proposal, an initial step in the proposal process, has attracted more participation. This difference may be due to the cost of voting on-chain versus voting off-chain, which we will explore later.

Understand the governance history and evolution of Uniswap and SushiSwap

On-chain governance vs off-chain governance

Uniswap governance happens on-chain, while SushiSwap governance happens off-chain through Snapshots. Since Uniswap proposals are voted and executed on-chain, the governance process is more stringent.

Uniswap’s proposal starts with a Temperature Check to determine if the community has enough funds to change the status quo. Any community member can submit a proposal for Temperature Check, which will be posted on a forum hosted by Discourse and voted off-chain via Snapshot. Proposals must have a threshold of 25,000 UNI affirmative votes to advance to the next stage.

If this threshold is met, the proposal goes to Consensus Check, which establishes a formal discussion around the proposal. Using feedback from Temperature Check, members resubmit updated proposals and new Snapshot polls to the Governance Forum. To pass the Consensus Check, you need to get 50,000 UNI upvotes within 5 days.

On-chain governance proposals are the final step in the governance process. Since these final proposals and voting happen on-chain, executable code must be written and reviewed to submit these proposals to the governance portal. In order for the vote to pass, it must reach a quorum of 4% of all UNI (40 million) in favor within 7 days. If the proposal passes successfully, a two-day timelock is placed before the proposal code is executed.

The SushiSwap governance process is less formal. Any community member can submit a proposal to the SushiSwap forum for public discussion among community members, and often votes to see people’s sentiments. Guidelines for moving to the next stage are not well defined. If the proposer believes that the community’s comments on the proposal can be advanced to the next stage, the formal proposal is published to Snapshot. 200k SSHIPOWAH needed to vote on Snapshot. During the 7-day voting period, the proposal needs 5 million SSHIPOWAH votes in favor to pass.

This process can be summarized as follows:

Understand the governance history and evolution of Uniswap and SushiSwap

Since voting happens off-chain, it is managed by the core team through multi-signature. Any transaction using the devfund wallet requires the signatures of 3 of the 6 members of the devfund team to be approved. Any changes that fall within the purview of the core team, such as managing pools, using growth funds, must go through operational multi-signature and obtain at least 3 signatures.

We will notice significant differences in quorum requirements. Of the 90 million eligible SUSHI votes, 5 million or 5.5% are needed to pass the proposal, while UNI’s needs 40 million votes (12.5%) to pass the proposal. UNI requires holders to intentionally delegate to participate in governance, and SUSHI holders may be eligible to participate in governance for various non-governance-related reasons. The result is a higher participation rate for eligible voters, allowing them to have a higher quorum threshold.

On-chain and off-chain governance does have a significant impact. SushiSwap proposals are ultimately executed by multi-signature holders, which means that even if a malicious proposal is passed, its impact is limited. At the same time, the threshold for proposals can be lowered, allowing more community members to be eligible to draft and submit proposals. In fact, around 90 SUSHI members are eligible to submit proposals, compared to only 35 for Uniswap. Additionally, Uniswap’s on-chain process requires the implementation of specific security mechanisms to prevent malicious governance, including:

  • Timelock Latency: All governance and other management operations need to stay in a timelock for at least 2 days. Since UNI is a freely tradable asset, anyone can try to take over governance through market purchases. If a group does achieve a hostile takeover, the delay in the timelock will give the affected parties time to withdraw their assets from the agreement.
  • Delegated balance check of the previous block: The balance check of 2.5 million UNI required to submit the vote is set exactly one block in the past. This prevents outstanding transactions (spanning multiple blocks) from affecting the voting process.

Both SushiSwap and Uniswap require voting rights (such as delegation or SSHIIPOWAH requirements) before submitting a proposal. This requirement prevents malicious actors from speculatively buying assets and influencing voting.

There is also a cost difference: on-chain voting is more expensive due to transaction fees, while snapshot voting is free. On-chain voting further reduces the participation of smaller wallets, which may lead to a greater concentration of voting power.

cultural difference

Differences in governance often reflect differences in the communities formed around the project. More power distribution and less stringent engagement requirements often reflect a community that welcomes newcomers and prioritizes relationship building. Fittingly, SushiSwap’s governance forum feels less formal, younger, and more fun.

In contrast, Uniswap’s centralization of power, expensive on-chain voting, and strict proposal process creates a more institutionalized and professional environment. For newcomers, it seems unlikely to get involved. However, this difference is not necessarily a bad thing – Uniswap has become the blueprint for protocols looking to maximize efficiency and optimize decision making.

measure success

Despite SushiSwap’s early success, Uniswap still leads the pack in terms of TVL, trading volume, and number of traders. Uniswap rolled out an updated product (v3) and a new user experience with great efficiency and with few issues. These criticisms aside, governance models — more like oligarchs than true democracy — have proven to be remarkably successful.

Understand the governance history and evolution of Uniswap and SushiSwap

SushiSwap has taken a difficult road.

Now let’s take a look at some conclusions from our comparison:

  • Governance Launch: Without a fair launch, it is difficult to achieve an equal distribution of voting power. Uniswap’s initial 40% distribution had lasting influence – the top 10 voters (many of whom were investors or advisors) now hold 46% of the voting power. Sushi is fairly evenly distributed, with the top 10 wallets holding 29%. This is obviously a difficult problem to solve.
  • Voter Eligibility: SushiSwap’s eligibility requirements may spur protocol development (those who want to participate in governance must stake or provide liquidity), but this artificially increases the number of eligible voters while reducing participation. Uniswap’s mandated voting requirement gives it a higher eligible vote participation rate (32% vs 7%).
  • On-chain vs off-chain: On-chain proposals reduce participation.

In practice, decisions about governance structures always come with trade-offs. For projects looking to develop decentralized governance, evaluating the impact these trade-offs will have on the future of the project and the community formed around it is critical.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/understand-the-governance-history-and-evolution-of-uniswap-and-sushiswap/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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