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Is the SushiSwap saga a preview of a new wave of crypto chaos?

September 9, 2020, 6:25 PM UTC

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In two short weeks, a whole cyberpunk soap opera has unfolded in the burgeoning world of “decentralized finance,” a segment of the cryptocurrency community that aims to reinvent the financial system for a digital era.

In late August, an anonymous developer sporting a cartoon panda chef avatar led a crypto rebellion. He “forked” the code underlying a popular cryptocurrency project, essentially copy-pasting the open source software underpinning Uniswap, a so-called decentralized exchange, to create a rival project.

So was born SushiSwap.

Chef Nomi, as the rebel-bear called himself, attracted a following with promises of a “fair launch.” He claimed that SushiSwap would give no preferential treatment to traditional venture capitalists; instead, the project’s own community would guide, control, and profit from the new exchange. (Uniswap is, in contrast, backed by VC firms like Andreessen Horowitz.)

The programmer-panda promised not just high ideals, but high yields. Sushi tokens, which offered the prospect of shares in SushiSwap’s revenues and voting rights, would be awarded to people who put up funds. Specifically, early believers who deposited tokens first issued by Uniswap would gain Sushi tokens. In this way, SushiSwap encouraged the cannibalization of Uniswap, siphoning off its deposits. People dubbed the maneuver “vampire mining.”

The bloodsucking gambit worked. Uniswap’s deposits swelled from $300 million to $1.6 billion as investors flocked to the exchange seeking to accrue tokens that they promptly deposited at SuhsiSwap in the hopes of reaping bigger fortunes.

The technical dynamics of this battle can be confusing, but the bottom line is that SushiSwap aimed to eat Uniswap’s lunch—and it was well on the way to success. “Sentiment in the community was divided over whether this was a parasitic cheap shot at Uniswap, or a brilliant way to relaunch Uniswap in a ‘fair’ way,” said Sam Cassatt, a member of the decentralized finance (aka “DeFi”) community.

But despite the pseudonymous founder’s professed idealism, Nomi ulitmately burned his believers. To fund SushiSwap’s development, the leader delegated 10% of all Sushi tokens to developers working on the fledgling project. Because Nomi was in practice the only real developer, he claimed that fortune for himself. Riding an upsurge in Sushi’s price, Nomi exchanged his high-flying tokens for more than $10 million in Ethereum this weekend. Surprise, surprise—he cashed out.

People were, obviously, outraged. They accused Nomi of perpetrating an “exit scam.”

Nomi, for his part, said he was still committed to the project. He said his selloff would enable him to concentrate on the technology rather than the price fluctuations of Sushi tokens. Nomi compared the move to a similar one taken by Charlie Lee, developer of Litecoin, a Bitcoin spin-off, who cashed out of his own cryptocurrency at the end of 2017.

But the backlash was so severe that Nomi ultimately doffed his chef’s hat. He turned over the project’s “keys” to someone else: Sam Bankman-Fried, CEO of FTX, another cryptocurrency exchange, who had proposed a way forward for the project on Twitter.

Now in charge, Bankman-Fried is managing the migration of people’s funds—the vampiric bloodletting—from Uniswap. “Right now we’re focusing on making sure the migration is successful,” Bankman-Fried told me shortly before commencing the transfer of assets. He says he aims, ultimately, for the project to “be in the community’s hands.”

The SushiSwap saga might seem like an arcane dispute in a niche industry, but it could be a preview of future battles. The DeFi trend is quietly gaining steam, much like the “initial coin offering” cryptocurrency boom of 2017, and the outsize returns of early adopters make financial shenanigans of various sorts all but inevitable. These early skirmishes will determine whether DeFi can live up to its aspirational potential as an alternative, open source financial system.

SushiSwap may yet survive and thrive. But Nomi’s promise of a “fair launch” turned out to be a deal as raw as a plate of sashimi, and much less appetizing.

***

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Robert Hackett

@rhhackett

robert.hackett@fortune.com

DECENTRALIZED NEWS

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Debits

Bitcoin price hovers around $10,000 ... Citigroup's $900 million fat-finger proves hard to reverse ... David Graeber, monetary historian and anarchist activist, dead at 59 ... Tech stocks pull back after SoftBank revealed as whale ... Regulators expand probe into spying at Credit Suisse ... Hedge fund Arca demands change from Gnosis crypto project ... JPMorgan investigating possible Covid bailout fraud ... High-flying Chainlink crypto system suffers minor exploit ... London QAnon rally targets blockchain.

BUBBLE-O-METER

$380 million

The value of collateral 'locked' in Swerve Finance, a new decentralized finance protocol, within 12 hours of its launch. Funds locked in DeFi projects are used for loans, to back stablecoins, or to provide trading liquidity, and depositors earn yield - sometimes, at least on paper, very high yield. What's most notable about Swerve, however, is that (much like SushiSwap) it's a 'fork,' or slightly modified software clone, of another DeFi platform, Curve Finance. The total value locked (TVL) in Curve is currently over $1 billion.

FOMO NO MO'

The concept of money might be the greatest illusory trick of all time. Over history, all sorts of things from paper notes to gold bars, seashells to giant rocks, and indeed, lines of code, have superseded relative obscurity to be worshiped as money. A mythical system of value is only “real” because we believe it is.

From Leah Callon-Butler's new review of the book Bitcoin is Magic - written by Fortune's David Z. Morris (a.k.a. the editor of this newsletter). The book is focused on the power of symbols and memes in constructing the alternate reality that is the cryptocurrency ecosystem, and the online world more generally. Callon-Butler finds it to be a fitting "spawn of 2020," as every layer of reality is upended by digital symbols and group adherence. Many thanks to Leah.

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MEMES AND MUMBLES

This edition of The Ledger was curated by David Z. Morris. Contact him at david.morris@fortune.com