DeFi protocol Umami Finance sours as CEO goes rogue and core team quits

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A dramatic week has resulted in the mass-resignation of Umami Finance’s core team and a crash in the price of the UMAMI token, as the project’s ex-CEO allegedly dumped his token holdings.

Umami Finance claims to be “pioneering the institutional adoption of DeFi,” but TradFi investors are likely to be put off by recent developments. The Arbitrum-based platform focuses on ‘real yield’, one of DeFi’s latest buzzwords, with the aim of attracting institutional investment with low-risk, delta-neutral plays and careful compliance procedures.

However, following the Jan 31 announcement that staking rewards would be paused, Umami’s staking TVL began to drop sharply, from over $20 million to just $5 million at the time of writing. The project decided to suspend the flow of funds pending completion of a compliance review by legal partner Fried Frank, exercising caution as regulatory pressure in the crypto space heats up.

In what now reads as crystal-clear foreshadowing, the project’s CEO, Alex O’Donnell (also known as DeFiAlpha) posted on Twitter:

“‘Kill your darlings,'” O’Donnell tweeted. “It refers to novelists who face tough tradeoffs in pursuit of the perfect narrative arc. Applies to startups, too.”

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Less than a week later, when UMAMI’s price began to crash from over $18 to a low of $7, an Umami developer wrote on Twitter that O’Donnell’s wallet was dumping tokens and triggering the drop. The dev assured users that treasury funds are safe, and the team had resigned from the project’s legal ‘wrapper’ Umami Labs LLC with the aim of returning to a DAO structure. 

O’Donnell’s alleged address cashed out a total of 44,000 UMAMI tokens, valued at approximately $800,000 at the time. These were then market dumped for USDC, netting around $380,000 as the price of the token crashed by over 60%.

Apparently, users still have confidence in the team’s ability to deliver as a DAO as the price of UMAMI has since recovered to $14 at press time. The team plans to move forward with Umami’s roadmap, with new vaults set to be released soon. The control of treasury, contracts, and the protocol’s front-end all remain in the hands of the DAO multisig, a type of wallet which requires the digital signatures of multiple parties to execute transactions.

‘Wrappers’ are legally-established entities which act as a link between DeFi and the traditional financial system. In Umami’s case, these were Umami Labs LLC, registered in Delaware, USA, and the Umami DAO Foundation, based in the Cayman Islands.

With the team abandoning their ‘wrapper’, they will likely find it harder to appeal to their intended audience but, on the other hand, will have no issue restarting the distribution of staking rewards to Umami users.

DeFi projects often claim to be run by decentralized governance procedures, but in reality many ultimately rely on the votes of token-holders being executed by a multisig wallet, controlled by core team members. Advocates of decentralized governance often refer to these types of organizations as DINOs (decentralized in name only).

Other, longer-established projects such as Uniswap and Compound use fully on-chain voting mechanisms. However, this model can also present problems, such as centralization of voting power or delays in bug-fixes.

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