Bent Too Far: How Umami's Institutional Ambitions Almost Tore the DAO Apart, Forcing Out CEO

One of the hottest DeFi projects on Arbitrum has been rocked this week, with the ex-CEO dumping his entire portfolio and the DAO forcibly reclaiming power

Samuel McCulloch
Samuel McCulloch
Feb 9, 2023
Bent Too Far: How Umami's Institutional Ambitions Almost Tore the DAO Apart, Forcing Out CEO

Update 2: There are now 2 Umami Discords, one run solely by Alex O’Donnell under the guise of Umami Labs LLC, and the other with the DAO members and core team. O’Donnell has setup a new blog where he has made several announcements that “ex-employees illicitly seized Umami’s $4m+ treasury & its IP,” and that they had “no right to take treasury funds and IP for its own use.” Furthermore, even though existing Umami DAO token holders voted 99% to endorse DAO Proposal #1, O’Donnell called the vote “notlegally binding” and demanded the return of treasury assets to Umami Labs LLC.

Core team member Clonescody also published part of Umami Labs LLC’s insider trading policy that defined the penalties for selling tokens using non-public information. According to the policy, O’Donnell could have been terminated as CEO for violating the policy.

Update: Umami community member Afirebrand, better known as CryptoCondom on Twitter has put forward “Umami DAO Proposal #1: Instatement of Core Contributors and Tokenomics Solidification.” The proposal recommends four items:

  1. Hire the former Umami Labs LLC team as Umami DAO contractors. Alex Golubitsky will also be retained as CLO.
  2. Rights to the code stay with the DAO and revenues will be shared between marinators as staking revenue and the DAO owned treasury at the previously agreed upon rates (50/50 split)
  3. Treasury revenue distribution will be reinstated to stakers at the previous rate of 50% revenue
  4. The Umami Labs agreement with the Umami DAO will be dissolved in full.

This vote will be renewed in 6 months. If the repetitional damage is beyond repair, Afirebrand recommends a vote be put up to dissolve the DAO and distribute treasury assets to token holders.

Over the past two weeks, Umami Finance and its DAO have gone through a maelstrom of structural changes, culminating with yesterday’s departure of Carl Alexander O’Donnell, better known by his moniker DeFiAlpha (DFA). The decision was punctuated by O’Donnell selling his personal portfolio of 60,000 UMAMI tokens, worth $586,000 at time of writing, into the Uniswap V3 pool and then promptly moving the assets to his Coinbase account. The move culminates a two week whirlwind of power dynamics between O’Donnell, who is the CEO of Umami Labs LLC and the members of Umami DAO.

On Jan 31, 2023, Umami announced a controversial update to how the protocol would function and be governed. Among the changes, O’Donnell unilaterally announced the removal of Chief Legal Officer Alex Golubitsky. He was to be replaced with corporate giant Fried Frank, in what O’Donnell described as a “meaningful transition to its [Umami’s] legal team.” O’Donnell also announced his decision that treasury payments to Marinators would be halted due to recommendations from their new legal counsel while the firm conducted a “compliance review.” He also said in a subsequent Twitter Spaces that the Marinator product was “not part of the value prop or fundamental value of Umami” and the end goal was to turn Umami into a permissioned, “compliant,” and institutionally-friendly yield generation service.

In addition to the infighting over legal counsel, O’Donnell was justifying the transition as a reason to transfer treasury assets from the DAO into Umami Labs LLC, where he was CEO and a shareholder. Labs is a wholly owned subsidiary of Umami Holdings LLC, and Labs was the operational entity, servicing the DAO. Labs’ governance was structured so that O’Donnell would have final decision making authority and he had been lobbying privately for multi-sig members to transfer the treasury to Umami Labs LLC. This would have effectively neutered the DAO and its voting power, and given O’Donnell full control over access and strategy over the asset war-chest.

The situation came to a head on the night of Tuesday, February 7, when the Core team made a unified request of O’Donnell to change course. At first he tentatively agreed, then reneged on his decision the following morning. In response, the entire team fully resigned from Umami Labs LLC and took to Twitter to make their case public.

For most of Wednesday, Umami’s Discord channel was quiet, as the core team negotiated with O’Donnell, who still controls all comms channels as of publication. It was only after O’Donnell sold his entire portfolio of UMAMI that multi-sig members Wenmoon and StevenT removed O’Donnell’s access to the treasury. The Umami multi-sig is currently controlled by tech lead 0xPrePop, 0xWenMoon, Steven T, Front End Lead Greypixel, and Chief of Staff Jefferson Chang.

Late Wednesday, Clonescody, another Core team member, led a three hour voice discussion in Discord rallying the community around the original mission of the Umami DAO. He assured the DAO that funds were safe, the project would continue, and the damage O’Donnell had inflicted would be undone. Afterwards, he posted an update to his personal Twitter account stating Umami would be transitioned back to a DAO, O’Donnell had been fully removed, his vesting contract shut off, and, most importantly, that Umami DAO retained control of the code base, vault products, and front end.

Former CLO Alex Golubitsky told Flywheel:

Carl Alexander O'Donnell, the former CEO of Umami Labs, abused his position within Umami Labs, a services company for the Umami DAO, to attempt to transfer the Umami treasury to Umami Labs in contravention of both the agreement between Umami Labs and the DAO, and the publicly stated policy of Labs. He was stymied in this effort by Umami's controls on treasury assets. Once he realized that he could not abuse his position of trust in Umami Labs, he opted to dump his accrued tokens on the market, in contravention of his fiduciary duties and Umami Labs policy.

What transpired at Umami in the recent weeks represents a failure of centralization, and underscores the importance of decentralized governance for community accountability. The damage that Mr. O'Donnell caused, which was minimized greatly by the quick actions and diligence of Umami team members, was allowed by the centralization of control in Umami Labs. In fact, Mr. O'Donnell's actions demonstrate how 'compliance' can be a trojan horse, allowing bad actors to centralize control under the guise of government regulation.

Umami Labs is tarnished as a brand, and will be terminated as quickly as possible. It is my sincere hope that people are able to distinguish the incredible team and community at Umami DAO from the failed experiment of Umami Labs. I am very optimistic for the launch of the Umami's vaults, by the DAO, and I look forward to this chapter of Umami's history being closed in favor of a bright future ahead.

Now that O’Donnell has exited his position, the Umami team will continue with the launch of their planned vaults for GLP next month. The team said in Discord that the shakeup will only setback the launch of the vaults by a week or two.

Umami was originally launched as a fork of Olympus DAO on Arbitrum. In early 2022, the original founders left the project and the community went to a vote to determine if the treasury should be redeemed and the DAO dissolved. O’Donnell led a faction against shuttering the project, gaining enough support to defeat the vote and assign the multi-sig to a new set of persons. Over the next several months, Umami pursued yield generation strategies on top of GMX that has become a mainstay in DeFi. At the same time Alex led the project towards its ill-fated pivot into institutional DeFi. “In retrospect, it's now clear that this pivot towards institutional DeFi was his (O’Donnell’s) excuse to create a company for him to be CEO of,” Umami advisor Haym Solomon told Flywheel DeFi.

DeFi Advisoor, a DAO member that had been critical of Umami’s changes told Flywheel he was “Happy to learn that the decent folks on the Umami team have regained control of the protocol and funds. Hope to see them lead the project back to its natural habitat again - truly permissionless DeFi.”

Since selling his tokens, O’Donnell has deleted his Linkedin. Previously, he worked 7 years for Reuters as financial journalist, covering M&A, private equity, and tech.

Authors note: We reached out to O’Donnell at 10am EST while writing the publication and shared a draft. He said that he would be making a statement later in the day. At 3pm we decided to publish without his comment. He later wrote to us that the article is “filled with inaccuracies” and that it wasn’t reasonable to give less than 24 hours for comment. O’Donnell did not provide any further information as to what was false or untrue.

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