ZK Podcast: A Tale of Sushi(Swap) with Tarun, Hasu and Anna - Part1

Transcript

[Music] welcome to xero knowledge a podcast where we talk about the latest in zero knowledge research and the decentralized web the show is hosted by me anna and me frederick in this week's episode we have a special crossover episode between this podcast and the uncommon core podcast hasso tarun and i will be discussing the emergence of governance tokens and share a play-by-play recap of the sushi swap saga to date part one of this will be on this channel and part two will be on the

uncommon core podcast so be sure to check out both just a quick note the majority of this episode was recorded the day before the uniswap token launch so we added a short amendment at the end to capture this but before we start in i want to say a big thank you to this week's sponsor leased authority leased authority is a security consulting company known for their work on privacy respecting solutions they are a team of security researchers open source developers privacy advocates and cryptographers they specialize in security audits design specification reviews and security by design they're most known for these security reviews which includes work with zero knowledge proof systems as well as having implemented

zero knowledge access passes with the distributed storage systems tahoe laughs it seems fitting then that they are now working on a step-by-step guide for building zk snarks it's called the moon math manual which you can find and donate to on git coin right now in fact as an aside the zero knowledge podcast also has a grant on git coin and so that gives you two reasons to head over to gitcoin.com during the clr matching and donate if you're interested in working with least authority on anything zero knowledge related do reach out to them whether you want an audit on your project want to collaborate on security research or even if you just want to learn about zk proofs they would like to hear from you i've added the email in the show notes

or you can also visit them at leastauthority.com so thank you again least authority now here is the sushi swap saga with hasu taroun and myself so for this episode we have a special crossover episode planned today we have hasu on the call or actually it's hasu and i are going to be doing this podcast together the first part is going to air on the zk podcast and the second part is going to air on uncommon core hasu's podcast oh yes and our and our special guest is the sometimes guest host of the zk podcast i know he's been also on uncommon core tarou welcome

back thanks for having me i i think i the crossover episode thing is totally a throwback to the 90s when you know different tv shows would have you know one character show up in another one's episode i know the universes are colliding a little bit for people yeah we have the zk folks and the actually how would you describe your audience i have no idea to be honest okay i think everybody should be pretty technical people who follow me on twitter the point of this episode is actually we're going to be talking about governance tokens and diving into the recent events around the sushi swap what do we call that vampire attack

yeah i mean like i guess that's the simplest or the sushi swap events or something attempt i mean yeah i think the term vampire attack is actually quite nice when it refers specifically to draining liquidity or capital from another project which was the case here yeah so i think maybe to kick off we should all very briefly introduce ourselves for any new listeners who might be hearing this podcast for the first time or anyone who isn't familiar with you guys yet so hasu do you want to start sure so yeah um i guess most people would know me from twitter where i'm pretty active i'm a researcher in this space i've done some longer form research mostly into the security of layer 1 blockchain such as bitcoin

and ethereum but i also run the research desk for dairy bit insights do that together with suzu who's also my co-host at the the uncommon core podcast which uh will air the second part of this episode and i hope you are going to check it out we'll be adding a link to this in the show notes to anyone who's listening so for sure you're gonna be able to hear part two and how about you tyrone i'm the founder of a company called gauntlet we do sort of multi-agent simulation to stress tests d5 protocols and proof of stake protocols you know when it's a multi-agent simulation think like alphago or open ai but you know previously i i worked in finance and hardware so i've kind of

somehow been in the intersection of this stuff and have spent a bunch of time writing some of the early peer-reviewed papers of understanding why i love d5 protocols actually you might know tarun from his paper on how defy can actually challenge the security of proof of stake networks by creating higher yield opportunities and that leading to and that's the segue to this episode actually a vampire attack so how mad are you tarun that you didn't come up with the name vampire attack because you you basically described this 100 yeah i think it's more i'm not the meme type of person you know i'm just like not good at coming up with memes

so i yeah i guess i should feel kind of bad maybe my halloween costume is going to be a vampire this year but i'm happy something that was meant to be a academic exercise to convince cryptographers that there's these types of attacks can happen turned out to happen in practice it's now a meme yeah yeah i think eth2 is certainly going to be that launch is going to be very exciting because of this type of stuff so you think that east 2 is a vampire attack on defy oh eth2 might be a vampire attack on d5 it's also sort of a vampire attack on miners totally in some ways the difficulty bomb is a little bit like yeah so you know i think it's gonna be great to talk about the stuff because i think

the next generation of networks are sort of gonna have to grapple with this at the layer one level wow anna you run a validator that aims to support zero knowledge research it's true how do you feel about a vampire attacks as someone who's like running infrastructure that potentially could could get attacked i'm anna to anyone who's kind of new to this episode i'm the co-host of this podcast i do something called the zk summit i do a lot of things with zk at the beginning of them and one of them is the zk validator so a twitter user and i'm also a twitter user i have been cited as a twitter user in a publication actually um but uh yeah so the zk validator i mean

the thing is the zk validator we get to actually work across a bunch of different networks and to your question i mean i think at this period in time there is actually you know funds are being generated through the validation action but we are obviously looking very closely at what dfi is doing and how that might be interacting in the future so yeah i would say like i'm keeping an eye on it ready to pounce whenever there's a great opportunity i don't know so you would only do validation with the funds or would you also explore other opportunities with the money that could potentially get a higher yield to your customers yeah so here's the thing with the validator that i'm doing is actually like we have no tokens basically no tokens of our own we're a

community funded like all of the funds are generated through the commission from the validation for other people so like in a way i mean if we find opportunities where people can actually potentially validate or do something like validation through us and we can use some sort of commission to fund the zero knowledge research advocacy and all of the work that we're doing around that then we would and we assume that the people who are staking to us on some networks if they happen to have other kinds of tokens they might be interested in also supporting it there so i don't necessarily see it as like a deep threat but it's going to be interesting to see how it evolves anyway that's our intros but let's move on

to the main topic of this episode which is going to be about governance tokens and specifically the sushi swap attack so let's first define governance tokens maybe tyrone you want to do that sure yeah so i think the correct way to think about governance tokens is imagine that you own equity in a company and you know you it's like shares in a company like stock what do you do with your stock well one is you hold it and hope for a number go up but number two is which is is way more important in the normal world until sort of now has been much less important in crypto is you use those shares to to vote on governance changes and so proof of stake protocols i think in particular have

spent years over engineering to some extent governance protocols so that they're adversary resistant in a lot of ways but no one uses those protocols or votes in their governance like barely there's like just no no usage and so you didn't really see many people actually exercising those votes um governance tokens however in d5 correspond to smart contracts that are acting as banks to some extent giving users equity in the protocol and that equity these tokens it gives out allows you to vote on parameter changes so you can vote on

changing the interest rate curve you can vote on changing the emissions how fast it gives out equity you can vote on what types of collateral are allowed to be used and these governance tokens unlike shares unlike a stock let you vote on code that gets executed and so this is you know the first people in the cryptocurrency space to really talk about this were probably teslas in 2014 or 13 and their system can execute those but no one that no one really cares like there's like there's a very small set of voters and very small set of proposals in proof-of-stake governance because a lot of proof-of-stake coins are their own governance token and what we found is that in in defy

because people are voting on cash flows whether explicitly or implicitly and the implicit is usually because no one wants to be called a security and so if you say that these tokens have rights to cash flows or securities automatically so you say they're valueless tokens that only are used to change parameters and vote on changes to parameters to these protocols but a lot of them i'd say let you execute changes in code and why this is sort of revolutionary versus evolutionary is in the normal market if you own you know 10 of goldman sachs shares and you want to say hey goldman i want you to do a buyback because the share price

is too low i want you the company to go buy stock on the open market increase the price you have to propose a new board of director like a new director for the board you have to get people to vote that director in that director has to go convince the company and the ceo and management to go do a buy-back and then they have to do the buyback that process can take forever and involves a lot of politics whereas with governance tokens people can just vote based on the amount of tokens they have on doing a buyback as a piece of code and then once the code is voted on it gets executed and it's a much more efficient way to do certain types of processes that exist in the normal market

but governance tokens in this context they're not pure like you just sort of said that it's like they're not actually valueless yeah i mean that's that's an sec avoided i never understood this like meme that governance tokens are valueless because if you have a token that can vote to direct yourself dividends like a stock then it's of course not valueless right but the sum of all these governance tokens is actually all of the future revenue of the protocol yeah i think it's all avoiding like the sec coming after you mechanism to say they're valueless that has nothing to do with the truth of them being value full or not a lot of proof-of-stake protocols got in trouble with this

and like they have a weird tax classification i want to go back to something that you said so you said it's revolutionary that in governance tokens basically the votes can vote directly on any decisions that are implemented by the company slash protocol and it seems to me like this is basically the distinction between direct democracy in crypto where each share is like one vote and whatever the votes directly decide is going to be implemented and representative democracy where which you would have in a traditional company where the votes basically vote for a representative and that representative can then go and do that thing but they are largely like left unchecked most of the time

so do you think that like the direct democracy is actually the better form of governance or do you think that this is also unscalable for the same reasons why direct democracy has never scaled in a traditional world and thus we in crypto will also end up with representative democracy governance in the long run i think that the correct way at least the way i think about it is for financial decisions like buybacks it was actually just hard to mechanically do direct democracy like if you think about how share buybacks work it's like a really convoluted process created in the 1930s and every exchange in the world adheres to it you know it's like it's there's a lot of

like in the same way we see a lot of copy pasta defy protocols as we're going to talk about with sushi swap there's a lot of copy pasta legislation that has happened for exchanges and basically there's no technology to do most of the stuff and part of it has to do with regulators kind of being slow and not adopting technology and part of it has to do with inertia on the part of exchanges and companies because they don't want like the extra scrutiny and i think that this is revolutionary in the sense that it's like forced the issue and actually what we're about to hear is us we're going to basically be covering a story of quite the opposite of what you just described something that moved extremely quickly i mean the entire story is we're kind of

going to think about it a bit like a case study but it all happened within a three week period ish i think that in itself shows why people should pay attention to defy and ethereum because in this space the thing that wasn't able to happen in like the last 90 years in traditional finance for like a variety of reasons you can just go and do it here you know there's no one to stop you and if you're anonymous then there's also even if you do it there's no one to come after you later even if it blows up so i think that's why we see all these fascinating experiments play out so let's introduce sort of the players in this

scenario let's actually start with uniswap uniswap is a decentralized exchange where tokens can be sort of traded back and forth without a centralized middle person and you can also provide liquidity to unit swap by basically providing the both sides of a trade so you can put a certain amount of eth in a certain amount of another token um that's how uniswap exists they don't have a governance token and so far as far as we know don't necessarily have public plans for governance token unless something's been announced but i don't think so right okay so the way that people are actually rewarded for providing this liquidity

is to charge a liquidity fee that is then given back to the liquidity providers so in the form of the tokens that they actually put up not in any other sort of token yeah right so as a liquidity provider when someone basically trades against you then you get 0.3 percent of the trade as liquidity provider fee is that always fixed actually with unit that is that is always fixed for you for unisop it is for a lot of the other protocols it's not so this model of kind of incentivizing people to provide liquidity that started definitely to pick up steam at what point was this idea of instead of only providing and like dealing out that liquidity to the

liquidity providers at what point did somebody think about introducing a second token to that model um so actually the sushi swap concept of adding a token has existed in other competitors genoswap earlier so bancor which is famous for its kind of failed i mean failed in the sense that they raised hundreds of millions of dollars and like delivered basically a useless product and then eventually they kind of stumbled their way into copying uniswap bancore had this thing where they added a token to try to incentivize people to move to bancor and the idea is that one of the kind of very weird properties

of these unislop types of automated market makers they're called constant function market makers and the reason for that is they on each trade you preserve an invariant which is that you have to keep a certain function constant there's some details as to whether that's really true or not it's actually only has to be strictly increasing but the the interesting thing about these kind of constructs is that they have a type of loss that a lot of users are not familiar with when they trade on the centralized exchange and this loss is called lack of creativity people called it impermanent loss which is kind of stupid in some sense because you still lost money okay it's kind of weird to call a loss impermanent but the reason for this is that uniswap

itself kind of acts as an options underwriter it's really selling you something that's a little bit weird when you're a liquidity provider it's selling you what's sort of a straddle in options and so you you pay what options traders would call the greeks to hold that position and so people once i started using your swap realize that for certain assets it's actually really bad like this loss can dwarf you know you're earning fees on every trade but like the loss can be quite large in normal finance by the way this this thing has existed for a long time it's called volatility harvesting but you know crypto is very good at reinventing things so this loss people sort of in kind of march and april of this year

were like hey how do we subsidize this loss so that we get as much liquidity as people have on centralized order books or as much that could be as uniform as and so the history is actually bancor trying to claw their way out of a bunch of getting hacked a bunch of times and like you know copying stuff decided to kind of add in a token to compensate you for this loss so you stake your liquidity provider share and you get this token but around the same time bancor did this uh synthetics which is this derivatives platform ethereum also created this contract that became the ultimate copy pasta of the food coin revolution including sushi swap which is the synthetics reward contract syntheticsreward.sol

is probably the most copied contract in the last few months and what it does is it lets you do the following you provide liquidity to a uniswap pool so you provide ethereum and susd that's like synthetics dollar coin when you provide liquidity to a unisop pool you get minted shares the shares represent what percentage of the pool you own so let's say you own 10 of the pool you'll get 10 of the shares and the the the pool basically automatically mints and burns shares so when you withdraw money it buys your shares back and destroys them and when you add liquidity it means shares once you get the shares the shares are kind of your voucher for getting your assets back

plus fees you can take those shares and show it to another smart contract and say hey smart contract smart contract i'm providing liquidity proof of liquidity here's my shares and you can stake these shares just like proof of stake and when you stake these shares the other smart contract would reward you and the idea is that protocols can pay you for providing liquidity almost like market maker rebates in centralized exchanges by you staking your your liquidity provider's shares and so that whole rigamarole was invented by synthetics and then a bunch of other protocols started trying because synthetics very successfully was able to bootstrap a stablecoin that has no reason to actually stay at a

dollar out of convincing enough people to join the system and basically all the elements for the sushi swap drama have existed actually since march or april it's just that people didn't like kind of put the social puzzle together and i think compound making liquidity mining and yield farming a meme led to you know combine that with the fact that all the contracts exist led to sushi swap one one thing i just want to add is the synthetic contracts have gotten to the point where it's almost if you don't leave in the like the comments in the smart contract that's written by synthetics everyone will think you made it up why it's like a proof of authority type of security like oh

you wrote your own lp share staking thing okay so i think we've covered just the run-up to sushi swap so let's talk about how this project first appeared so it wasn't the first food-based project or food name a project named after a food there had been yams was it i would say yam was the first the first food first food group okay bottom of the food tournament someone actually tweeted out that there are a bunch more food-based companies that are extremely valuable such as apple and the point to this was that they were

specifically not food companies i got it so like tech companies with food and so naming apparently projects after food has a rich history with some very successful outliers so um yeah i mean we could tell talk about yam for a second here so the the way i understand it's basically a fork of ample forth um which is basically a money coin with rebasing mechanism so that means instead of the price going up and your account balance of that particular coin staying constant they do the opposite the price stays constant but your account balance constantly fluctuates

and you know same person could ask why would you possibly want to do that it has no benefit but nobody in the world is like is used to this sort of user experience when dealing with money and you know the response would be yeah it makes zero sense that the point is to deliberately confuse basically investors you could say so there's not really any point to it but so yam did this and a bunch of other things and they utilized the synthetics staking contract at least i think it was synthetic they just they copy pasta comp governance uh ample fourth and synthetic sorry i love the phrase copy pasta because you're talking about food coin stuff but i just mean copy pasting contracts

totally yeah so those were actually the recipes so you had ample forth um you had synthetic staking and you had comp governance so this was the idea of like having a kind of coin that has like these attractive to some parts of the market like elements of a ponzi scheme which is ampliforth and you have like this thing where the community owns all the coins there's no pre-mine and you can govern it yourself via governance um and where you can farm it via the synthetics contract so it combined these three very and it's a very attractive very successful components into something new and i think the demand to farm this asset via the synthetic staking

contracts was insane right within the first 24 hours over half a billion dollars went into these contracts that hadn't been audited so it was basically brand new project that did not afford because of the fair launch also did not afford to get an ordered and that's how it basically kicked off the hype around yam but the hyper on yam didn't last particularly long i remember it being about 24 hours before the sort of bug vulnerability was discovered and people i guess started to like take all their money out if they could what was the actual bug what was the thing that broke yam and i know that the project is still alive so maybe it's not actually broken

but what broke it then at that launch i can take a shot at explaining it um i think the rebasing mechanism was broken it minted too many new coins and the problem was that some of these coins were actually minted in the yem treasury which is like a place that governance can't control but the thing is because so much of the supply was actually in the treasury it couldn't vote for getting it out of the treasury and that's how basically a lot of like all the supply got kind of messed up and um and that's why they basically had to go back to the drawing board so that's how i how i understand it but i do think of it as sort of a precursor to sushi swap

because it was this like extremely exciting moment where this thing comes out and everybody jumps on it very quickly and i think if we now turn to the sushi swap launch and like how that like within i don't know two three days generated such excitement it has sort of a parallel it seems the one thing like one more thing that we should maybe mention is year on finance and wifey um so wi-fi is the governance token of young finance and it is i would say probably the blue chip kind of token lucha project of this particular market cycle so far in the sense that it's just a very good project and it has performed incredibly well since launch

and like a lot of people have missed out on this because it it went so far so quickly and there was just a lot of regret in the air like everyone you talked to so it was like very regretful about kind of missing the run up on on wifi so they were suddenly that increased the risk tolerance a lot right so there was a lot more to get in earlier basically for more to get in early on on any kind of new project like how did sushi swap actually start i don't really remember the first time i saw it announcement on twitter blog post i guess there was someone named chef nomi who was the developer and as far as i know like the sole developer behind this

this thing right there was no team really i know that there was somebody who joined for community soon after but the actual initial thing was just one developer i don't exactly know what the chef know me timeline was but but more or less you know i was in a bunch of telegram groups and all of a sudden it's like everyone by the way are you hungry for japanese food and i was like what the and uh and then then i like looked at the site and like this thing is a joke it's just like we have the finest omakase that you can make with your lp shares like the entire thing was like reading like there's a menu yeah one interesting aesthetic thing about yield farming is it like brought out

these 1980s video game vibes at first and then yams changed that aesthetic to this like how do you make a narrative around food and then sushi really took it one level further of like there was almost a plot so it feels like you're in a video game yeah and i think that's the thing that has really been the driver like a lot of this stuff feels like it's a video game and like the types of people who i are like i'm gonna put tons of money in and like not think about it are like people who i kind of view as like thinking of it as a game less of an investment yeah i mean if we compare this like to something like another big project that has a lot of people's money in it which is bitcoin it's like extremely user unfriendly and

like even hostile in many ways but this is sort of by design because it shows you that you are responsible for your money and there are consequences to your actions whereas d5 is taking like the new breed of kind of defect project is taking the exact opposite approach which is kind of it is the gamification of um basically financial applications so there is a word for that by the way casinos like it's not totally new that you make it shiny and flashy and fun yes that is yeah that is exactly what defi is doing right this this this stuff is just as risky or more risky as like

all the other cryptocurrencies and projects that we had in the previous years when people lost funds sorted by user error or because something went wrong but people feel a lot better about putting their their money the same money into stuff that looks very cute and gamified totally so yeah the sushi swap kind of what let's define what sushi swap was or is sorry i shouldn't say that it's still around let's define what sushi swap is then so sushi swap is a fork of unit swap although to start was it actually a fork so yeah that is actually something that i've seen a lot of people get wrong so a lot of people started saying out that sushi swap is a fork of unison it's an exchange while it was really just the

staking contract for unisrop ap tokens and that's why so many people were confused so why is uniswap's volume going up why is like the total value locked in units going up when there's this new competitor how does this make sense and the reason is that all of the money quote-unquote in sushi swap was actually in unison because sushi so was just a place to stake your unisop tokens so unisof actually saw a huge boost in capital and in trading volume from sushi swap that's what happened initially and then the idea would be that there's a quote-unquote migration where people agree that sushi swap is allowed

to go to unisrop with the stacked unisrop lp shares withdraw the money from uniswap and put it into a forked version of sushi stock but they did not prior to this exist and that is the moment when actually the exchange sushi swap would go live yeah so this i mean we kind of mentioned this but like when one would provide liquidity in uniswap you don't receive governance tokens but you do receive these lp tokens what did you just call them liquidity ap tokens and the lb stands for liquidity provider yeah so the liquidity provider tokens and that is what you would actually take and then stake

or put into the sushi swap contract one maybe slight nuance technical detail about the the sushi swap contract is that they included you had to authorize a transaction that allowed for this migration to work and what that means migrate basically means imagine you put eath and i don't know what could you stake i mean there were tonsing put magi put ethan and maker ethan and synthetics into a unisoft pulitzer s and x you generate some lp shares say you have 10 shares you stake it in sushi swap but you also sign a bunch of transactions that say hey when the sushi swap admin key

calls migrate it takes my shares destroys them and then makes the exact same version in sushi soap and you sign a transaction that allows that which is a slight difference in normal staking where you just get paid and it doesn't take mutation rights like mutab mutability rights on your lp shares so that that mutation thing is quite different than the normal staking that's where the vampiric part comes in on the technical level it's very good that you point that out because usually like eunice rob could not take the capital from your lp shares and migrate them somewhere else right so that is something that you signed exclusively with sushi swap it's a little bit like investing in an

activist hedge fund yeah in a sense yeah so once this like liquidity provider someone with lp tokens had moved or put their lp tokens in the sushi swap contract they started to receive what did we call them sushis sushis so it's the sushi token i say this like it happened so long ago i just anyway but we started to receive sushis or one would start to receive sushi token that would then they could actually take that out at any point and sell it if they wanted to a small marketplace or actually i guess a pretty substantial market bloomed out of that it was it was the most traded token the highest trading volume token in d5 for

the initial like three to four days and at the time i guess like you have this brand new token that's kind of being dumped on the market like who's sitting there being like give it to me at ten dollars so there's a bit of a really amazing game that goes on in almost all of these things that's recursive which is every one of these launches realized that once you're paying people for all this liquidity they need somewhere to trade it but there's nowhere to trade it there's no like finance isn't going to list you coinbase isn't going to list you what you do is you give people a bigger bonus for minting unislop lp shares of that token to ether that took into usdc basically market making the token

against other existing um coins such as eth or usdc and that's how they provided the liquidity for those people who are trying to sell it oh my god yeah but i mean you have to go a step further and realize that we talked about impermanent loss right on uniswap and when you provide um a token like or usdc and then provide sushi against that then i mean sushi is a token you have no idea where it's supposed to trade right at any moment it could like go 5x or it could lose 95 of its value and when that happens you actually stuck with basically the worthless talking of

the two so you you incur a lot of impermanent loss so nobody would really market make these tokens these super liquid tokens if they wouldn't get a large extra incentive in the form of even more sushi swap tokens and that's why you would earn like 100 sushi tokens in a regular staking contract and in the same at the same time you would earn a thousand sushi tokens in the lp contract if you put it there if you had put your lp tokens over were you still actually generating any of the like liquidity provider fees from uniswap at the same time yeah you were you were you were still a unisop lp the entire time i don't know if you can

tell but i did actually experiment a little bit with this but not clearly clearly didn't fully understand everything that was happening also was not very much money so uh one of one of the the great memes that the link marines have come up with for this idea that hey you're providing liquidity to this for this new token and eth and then all of a sudden the token price crashes and you hold a huge amount of losses uh is the rug tool getting the rug pulled under you and there's so many ridiculous memes i've seen of like pepe the frog having like another pepe the frog like pulling the rug under them and it's like i mean the level of like

artistic creativity that's gone into these things might surpass anything i've ever seen in crypto i mean it's it's like truly the memes have made their own economy yeah and i mean it goes back to this kind of gamification of any kind of financial application right because it's not fun to incur like large amounts of impermanent loss to your lp shares but but it's fun when you can tweet that i got rug pulled yeah exactly so i generally think it makes you feel better about yourself when you have these kind of memes to fall back to i mean so there was this this one kind of tweet or narrative that i remember like about three four days after this

launched which took it in sort of a different direction which was this idea that uniswap was a vc-backed kind of even though it's such a new project it was like the man that like the community needed to take down and that by using sushi swap you were making the community driven version and you were actually like taking the funds away for taking the power away from the vcs um what did you think about that all i have to say is this is a nonsense assertion unislop is the only public good that exists in ethereum like other than the chain itself in some ways the liquidity providers get all of the revenue

like there's no company getting the revenue right like uniswap look it just boggles my mind that you've convinced yourself that like you need a community which ended up being an exchange owner and nine out of eight other people as like the owner yes i mean you can really like an image that i like to draw is imagine you live in a city and there's like a public park that everyone can use okay and then there comes a group of activists who basically take over the park say we are taking it away from the men we are giving it to the people but they create like fences all around it and they charge five bucks entry because that is exactly what

sushi swab is that tech unit swap they make it worse they charge money for it but the beauty of such vampiric capitalism is that there's always another japanese food aka sashimi swap which eventually kind of took a ton of questions and then sake yeah they were like a bunch more kimchi i think i saw this one but that one had a bug kimchi sauce had a bug and people got very hard going actually back to the example with the park so let's let's let's actually say there was someone who fenced made fences all around the park and started charging entry so it's not all stupid right because privatization is

actually a valid strategy a valid solution to many strategic problems that exist in the real world so because once you have someone making money from that park and people paying money to enter the park you actually have someone who is in charge of the park who is the sole owner of the park and who is incentivized to make the park better to guess like what might the people want to do in my park what kind of food can i offer what kind of drinks what kind of activities they make sure that the park is kept clean right so that is really the idea behind adding ownership tokens or governance tokens to a project

because it basically attracts people who care about the project and who want to make it better so that that is what i would say is the bull case for for any kind of governance token crypto so like the migration originally was planned for two weeks after the project launched i remember that and then at some point the migration date got moved up and that was just around the time that the market took a little dive not a huge one but like all crypto prices went down and that day chef nomi started to sell some tokens some sushi tokens for eth that it seems like the community was not entirely aware

he had access or he or she had access to or full access to because there was never really talk about this pool of tokens was everyone aware that there was like one key basically one individual who owned who had access to this so i wasn't aware of it i mean i think in hindsight it was added some sometime later i think actually some some people on twitter suggested that they create a developer fund where ten percent of all sushi is created is actually siphoned off into this fund and put away for future development efforts such as security audits but also contract work you know design marketing that kind of stuff that is

basically the money or part of that money that chef nomi then took and withdrew yeah so chef nomi started to sell off a lot of the sushi that was in their possession and it dumped the price even further people noticed it was sort of two big sums that were dumped on the market and people started to get very angry the reaction was odd chef know me during this entire time was tweeting with people and saying like oh no i have to you know i just i don't want to worry about the price anymore and i'm too conscious about the price so i'm going to take my winnings and then i'm going to keep doing this thing don't worry about it um any theories we don't want to go

conspiracy theory i get it but like to me it seemed like we had a very inexperienced person on our hands who was suddenly in charge of a big project that maybe got a lot more attention than they thought and like they maybe had all these kind of ideas and dreams where they would turn into what they would do with all the money that they earned and then like a few things happened right so i guess like the biggest one is that the price started going from like ten dollars eleven dollars to around four dollars and well they basically lost their nerves i would guess i mean they saw it going to zero and saw basically the experiment failed and thought before it goes to zero first

let me actually try to pull up the migration and when that didn't work out i think there was a bug found in the immigration contract so they said we have to fix that first and they just cashed out and ran so that's that would be my interpretation of it something very important to note is that there was a very aggressive listing of sushi on ftx first like within 24 hours and then binance within another 24 hours that doesn't happen very often and i think that furthers a lot of the wtf-ing because you know binance used to charge people million dollars

plus like block stack which you know is a little bit of a zombie project land like they they had to pay a crazy amount to finance because they had to publicly declare it because they did a reg a right they paid like three million dollars right and somehow now they're just like listing food coins without thinking like there's something something was very you know i don't get me wrong i think the exchanges are run by smart people and they were very opportunistic when they saw that yeah i mean and they didn't just list the the spot sushi the future yeah they also created perpetual swaps for sushi i mean so like this is the kind of like for years ether didn't even have like perpetual

contracts on like the largest exchange or so and i mean some of the the coins actually in the top ten don't have perpetual swap contracts on these exchanges and then you get a token like sushi which gets a perpetual swap contract on the first day so you really have to go and think so why did this happen and so the idea was or like what many people suspected and there was actually a lot of evidence for this as well is that alameda is basically i don't know if like ftx is like a subsidiary of them or whatever but they are basically a market-making firm trading firm uh that have a lot of capital and they were most of the liquidity in sushi swap so they basically went and put their power behind this project and their capital

and and they just farmed it right but when you farm a lot of a token that is very new and it doesn't have a lot of organic demand then what happens if you try to sell even like 10 of your tokens then you would just crash the market to zero basically so they knew that they they couldn't sell their stake at least immediately so they they would have to sell it well they were selling it and the price dumped to 50 cents right from like five dollars and then remember on day one it was like there was like 60 million dollars from like three addresses that in nansen for instance you can see are tagged as alameda and uh which is a lot of money for an

unknown smart contract and now no one seems to blink an eye of doing that but you know there was a lot of money in there and they were farming like 80 plus 80 percent wow okay that's even more than i thought in the like first 24 hours before all of the like kind of dumb fun managers just were like oh alameda's doing it we'll do it too yeah which is like i think my messages were filled with people like hey what's the sushi thing i heard that the alameda's going in it should we just go in and size and i was like what yeah but in the beginning they were farming like most of it but the problem is they started selling it the thing is you're incentivizing people to take this in permanent laws by having them stake their lp share to like make sure there's a market for it

but they were really crashing it and then the future comes out yeah exactly yeah that's what i was going to say so you really can't exit that position in a normal way but what you can do if you're an exchange and i mean i think ftx is is partially owned by binance yeah or fully owned no no no no so they actually have like a hot wire to to binance as well right so what binance and ftx both did was list the token and all this yeah like you can assume that like all of the the sales set of the order book was probably ftx or alameda selling their own tokens the entire sell side of the futures order

book was alameda hedging their long position in sushi so they really did this as a way to offload their sushi tokens to their customers yes it is it is crazy there's a reason there's a lot of regulation that exists in non-crypto land of like exchange owners shouldn't be prop trading on their own yeah change which happened in the early early electronic markets bats which is the third largest u.s exchange was made by high frequency traders as a way to compete with nasdaq and naisi and ftx is very you know don't get me wrong ftx technologically is by far the best exchange like the other exchanges are boomer finance but ftx is is probably i would say of the

caliber to know what they're doing and they also saw this opportunity to like take away liquidity from uniswap which had been starting to eat away at a lot of exchanges right like the thesis is the following there's the big cap crypto so east btc going to be dominated by binance coinbase kraken whatever there's a mid cap of like you know 100 million market cap to a billion that's going to be dominated by the ftx of the world people who provide really good technology for trading coins it's not going to be provided by someone as with like a terrible api that doesn't respond correctly like binance and then there's the the really low cap the long tail

as unisop users would call it of like assets that like who knows if like people want to buy my like supreme sneaker nft tokenized but you know i can make a unisop market because it doesn't really cost anything and people can go buy it and this long this fat tail thing this food coin and the precursor to sushi swap made the like long tail seep into the mid cap where like you can have a yam coin that reaches the 100 to 500 million dollar market cap range and all of that liquidity and all of that trading is not at binance it's not an ftx it's not like coinbase it's all on unison that's scary decentralized exchanges so they're very much incentivized and they're also

not idealistic in the way that i think a lot of the developer side is and they think about adverse selection they're much more incentivized to try to do these vampire attacks especially as the market caps go up and the volume goes yeah so something um maybe to mention is that in the weeks before sushi swap unisrop actually had some of the highest trading volume in all of crypto so they actually had higher trading volume than coinbase not just coinbase pro also like coinbase and coinbase retail combined so they showed insane trading volume right i think that many centralized systems were generally like scared about them and still are today and i mean like you can we can speculate of

course but from the vantage point of being a centralized exchange it would make a ton of sense to fork uni-swap and try to drain the liquidity but in a way that you at least like either fully or partially own the exchange yourself right and can actually get these profits for yourself so let's talk a little bit about the aftermath of this like i think we're still at the point of the exit scam right now and and people are freaking out after chef nomi has left right we haven't actually done the migration yet like just in terms of our narrative okay yeah in case you're wondering anna's going to make a movie about you no kidding who will play the chef

that's what i like i would i mean i would she's she's like the narrator in like uh you know like the movie i'd watch it okay so this aftermath but actually maybe even before we do that there was one other point that was often mentioned which was not only the you know what you're talking about the threat to the centralized exchange but it was also this idea of potentially solana or like a what is it serum which lives on a different block is another layer one block chain like in terms of i okay they'll hate me for this but in terms of like their design philosophy you can kind of compare them a bit like to eos in the sense that that's not nice they have a few validators and they run extremely powerful expensive machines so they are

basically very very high throughput low latency blockchain and they had on top of them serum built like there's a dap or something that lives on their blockchain and there was some talk and i guess that never happened but there was some talk of like migrating sushi and this i didn't actually understand how this would work but like when the migration would happen they would actually happen on this serum it would basically fork it and create a basically a fork of sushi swap on serum how would it then interact back with ethereum the this is this is a an interesting thing that covers many of your prior guests on this show anna which is that uh sarah you know i think when sam first

samson's founder ftx first mentioned it to me i was like oh so how are you gonna do the cross chain stuff and he's like well you know salon is gonna figure it out and solano was like well prestwich is gonna figure it out and so theoretically and i don't know exactly how this is gonna unfold but theoretically there's supposed to be a safe cross chain bridge kind of like things you've talked about many times on the cpa podcast which is a very hard thing to build extremely hard and lots of people have made really crappy ones that have been exploited and people lose funds and serum is supposed to actually be cross-chained to bitcoin unease theoretically and so the idea is you know sushi swap could basically take advantage of it but then

is it is it built out of smart contracts that live on solana it's built off smart contracts that live off boats along that okay so like there's there's a relay contract on it so the relay contract is like something that relays the state between the two and the problem with this type of stuff is that a a lot of the fancy cryptography people use on the new chains is extremely slow or it's incredibly gas expensive on each so you can actually see there's a bunch of um eips that people have proposed for pre-compiles of like bls and other cryptographic primitives so that these relays can be faster otherwise they're really expensive and the way they get over the expensive thing is by lowering the trust model

of having a relayer and you trust that like there's enough relayers that it won't lie about the state transition which whatever but that's what people are doing so my point is like ftx hasn't solved this problem solana hasn't solved this problem and you know a lot of the scalability solutions really rely on good relays and as we all know our friend prestwich is the expert in all of this and so i don't know if i just missed it but did you mention what the relationship between ftx and serum actually is because i don't understand you you put them you speak about them in tandem so i'll get i'll give a little background because i've known sam for a while and i know a little bit of a backstory behind this which is so sam in may was like really interested in d5

and he was like this is actually going to eat potentially eat our lunch because okay sam is like order of magnitude smarter than all the other exchange owners so remember this he's like a math person sam was the first exchange operator to view liquidity mining the synthetic style thing as a threat and realize that like hey this could actually take away a lot of volume from my exchange and he was the first one to like really spend a lot of time reading code reading the papers under because he's like he's a very technical person compared to other folks and he basically in may was like i need to i need we need to build a dex

we need to actually be on top of this because like you know finance decks is a joke they run all the nodes bobi's whole thing is like it's kind of complicated and involves nervous and chinese government is slow and i don't i don't know there's like a lot of complication with the other exchanges because they're in china right so they can't quite do the dex thing as well but ftx was in a good position and they were like okay what should we use and because they're hft people they were like okay what's the lowest latency layer one blockchain we can find and that's so on it because solana's written with like latency in mind right uh because it's a bunch of telecom engineers like anatoly

and basically he was like i gotta do this now and so he set up the whole thing he was like okay here's how we're going to do it we're going to do on solana someone's going to build a bridge to eat and bitcoin and then we're going to have a dex there's going to be all the solana validators are going to earn some rewards and he set up within a month so like i think in june was the announcement something like that and you know i think for better or worse he's the only exchange operator who realized that this was going to come and he announced everything at the right time he also owns a prop trading firm that was farming in june like they were the biggest comp farmers for instance for a while and it's very clear that there are the personalities involved there's kind of this like

there's a huge lead-up to the sushi thing and i think he knows an opportunity when he sees it versus like some of the other exchange operators just like we're like way too late to the game to realize that that it's possible for dexa to eat i mean yeah that's such a great explanation and i think what most people don't appreciate about sushi is they just look at these events and maybe you see them as some standalone thing but like with every great event that kind of happens there's this it's almost like you only see like the very tip of the iceberg when you look at the event itself and don't look at everything all the parties involved their motivations and maybe how who of them felt like corner two of them felt like they had to

make a move now and that's always what leads to an eruption like this yeah and so some someone like chef know me right he's someone that the media ledges on to like the crypto media but he's he's a pawn like he's a tiny pawn in the story he's irrelevant like completely relevant the money toke is irrelevant he is a person is irrelevant they are like whales basically fighting against each other like large exchanges extremely intelligent well capitalized people are dueling it out we should say extremely intelligent well capitalized versus follower people so like another dynamic that's very important is that people kind of are like oh alameda's

doing it i'm gonna do it too and this like there's kind of this dumb follower mentality which is what made sushi's volume grow so high is that like oh they're they're doing it like oh we we gotta go in too it's like there's this herd mentality and that's also quite an important dynamic in the incentives okay so i think we're gonna stop the episode on the zk podcast here but this episode is not finished so please head over to uncommon core i'm gonna add the link in the show notes and there you can actually hear part two or actually the rest of this interview so see you there