Why Does Top Decentralized Exchange SushiSwap Create More Centralized Controls To Manage Risks?

Decentralized finance (DeFi) is supposed to be the ultimate expression of democratic governance. There is no human management, no incorporation in any jurisdiction and all issues decided by token-holder voting.

There aren’t even know your customer (KYC) or anti-money laundering (AML) checks.

And yet, token holders in SushiSwap — the 14th-largest decentralized exchange (DEX) with a 24-hour trading volume of more than $85 million and a market capitalization of $834 million as of Monday (March 21), is now voting on whether to create a Swiss-incorporated foundation.

So why is one of the top DEXs trying to create a foundation to provide both more centralized control and fit the project into a national legal system?

Simple. The proposal said it should be done “in order to mitigate future risks.”

Specifically, this will provide the decentralized autonomous organization (DAO)-run DeFi project with “legal clarity regarding the rights and obligations of token holders and contributors, limit liability of token holders and contributors, and create an apparatus to manage administrative issues for SushiDAO.”

See also: Unpacking DeFi and DAO

That sounds mighty centralized.

Indeed, the 243-word proposal also includes setting up a development company and hiring a general counsel, proposing that “various services entities can be created for contributors to the Sushi Protocol.”

Anyone holding the DEX’s native cryptocurrency token, SUSHI, which is required for transaction fees, can vote.

Targeting DeFi

DeFi projects have been in regulators’ and politicians’ crosshairs for some time, most notably with the Financial Action Task Force (FATF)’s recent Travel Rule, which required virtual asset service providers (VASPs) to follow KYC and AML regulations.

Among other things, it warned regulators not to simply accept DeFi projects’ argument that they are truly decentralized. In most cases, it said, these platforms have some person or legal entity that “controls or influences” the project sufficiently to be targeted for violations, according to CoinDesk.

Which is more or less what is acknowledged by the SushiSwap proposal, which so far has 100% voter support.

Certainly the U.S. is watching. In September, Uniswap Labs, the development company behind Uniswap, a DEX with a 24-hour trade volume of more than $1.3 billion — revealed that it was being investigated by the Securities and Exchange Commission (SEC).

Read more: Crypto Exchange Uniswap Under SEC Investigation

And SEC Chairman Gary Gensler has called DeFi “a bit of a misnomer,” adding that parts of the transactions are actually “highly centralized.”

Backtracking or Moving Forward?

So, what’s SushiSwap doing?

To start with, it chose Switzerland because it is a crypto-friendly destination — it was one of the first countries with a legal framework for crypto, and many projects, centralized and decentralized alike, are headquartered there. Meta’s abandoned Libra (later Diem) stablecoin foundation headquarters was to be there before the Facebook-founded project collapsed.

The Swiss Financial Market Supervisory Authority (FINMA) created a FinTech license in 2019, and in September imposed a 1,000 Swiss franc ceiling after which AML is required.

But more to the point, why incorporate at all?

Getting back to that “controls or influences” part of the FATF advisory, many DeFi projects have foundations and for-profit development companies created by project founders, which are generally necessary to scale the project and build a user base and liquidity. The strategy — often long term — is to get to where SushiSwap started.

A DAO is at the heart of all DeFi projects that runs a decentralized project via smart-contract controlled voting.

SushiSwap is an unusual DEX project, a “vampire” project that used the code base of larger Uniswap, offering better rewards to steal away the funds locked in its yield farming and liquidity mining offerings. (There was a also a big scandal in which the SushiSwap creator was accused of a rug pull, after which he returned funds and apologized profusely.)

See also: What is Yield Farming and Liquidity Mining?

Yet, despite its origins, SushiSwap still had a centralized structure. In September, the project’s leader — who took over after the scandal — resigned, saying in a resignation post that he “always strived for Sushi to be leaderless” and encouraged “decentralization as much as possible.”

Noting the project then had “20-plus core developers,” he added, “I put Sushi before my physical and mental health, my relationships, my family, and my friends.”

That also sounds pretty much like a centralized startup’s CEO.