Why SushiSwap's 'Kanpai' Proposal Exposed a Flaw in Treasury Management

The core failure was treating the treasury as a sovereign entity separate from its users. Kanpai proposed redirecting 100% of LP fees to the treasury, effectively zeroing out the core incentive for liquidity providers. This violated the foundational DeFi social contract: protocol revenue must align with value creation for its stakeholders.

• Broken Incentives: LPs, the protocol's backbone, were asked to subsidize treasury growth with no direct return.
• Governance Capture Risk: Concentrated voting power (e.g., Sushi's multi-sig) could unilaterally enact such value-extractive proposals.

Sustainable treasury growth must be accretive, not extractive. The correct framework is to use treasury assets to bootstrap Protocol-Owned Liquidity, creating a perpetual flywheel. This aligns long-term protocol health with token value, as seen in OlympusDAO's early model and Frax Finance's strategy.

• Accretive Treasury: Profits from POL (e.g., swap fees, yield) flow back to the treasury, compounding its value.
• Reduced Mercenary Capital: Owned liquidity reduces reliance on incentivized, fickle external LPs.
• Vote-escrowed Models: Systems like ve-tokenomics (Curve, Balancer) formally tie treasury distributions to long-term stakeholder commitment.

Kanpai was a reactive, one-off vote instead of a programmatic rule. Robust frameworks like Revenue Split Smart Contracts or bonding curve mechanisms automate treasury inflows, removing governance as a single point of failure. This mirrors how Lido automates staking rewards distribution.

• Eliminate Governance Lag: Pre-coded rules execute treasury funding at defined intervals or thresholds.
• Transparent & Predictable: Stakeholders know the exact economic policy, reducing uncertainty and panic votes.
• Reference Models: Look to Index Coop's Treasury diversification policy or Gitcoin's matching fund smart contracts.

Kanpai set a dangerous precedent that treasury solvency is a higher priority than core protocol utility. Post-Kanpai, projects like Uniswap (with its fee switch debate) and Aave have had to design more nuanced frameworks. The lesson is clear: treasury strategy must be designed upfront, not patched during a crisis.

• Design-First Treasury: The economic model must be codified at launch, not left to future governance.
• Stakeholder Primacy: Treasury exists to serve the protocol's users and security, not as an end in itself.
• Legacy Risk: Poor frameworks create permanent trust debt, as seen in Sushi's prolonged recovery.

DAOs often conflate protocol revenue with sovereign state revenue, leading to inefficient, centralized treasuries. Sushi's treasury held ~$40M in SUSHI tokens, creating a massive single-asset risk and misaligned incentives.

• Problem: Treasury acts as a passive, high-risk hedge fund, not a strategic war chest.
• Solution: Model treasuries like corporate balance sheets with diversified assets, yield strategies, and clear runway metrics.

Kanpai exposed how fee diversion creates a direct, recurring revenue stream for token holders, incentivizing short-term mercenary capital over long-term builders.

• Problem: Proposals become de facto dividend policies, attracting voters seeking yield, not protocol health.
• Solution: Decouple governance power from direct fee claims. Explore models like veToken (Curve) or locked staking to align voters with long-term success.

DAOs lack the tooling and expertise to actively manage treasury assets, leading to stagnation or reckless spending.

• Problem: Capital sits idle or is deployed via politically-driven grants, not ROI analysis.
• Solution: Build/use on-chain treasury management primitives: yield vaults (Yearn), delegated asset managers, and transparent, metrics-driven grant frameworks.