What is SushiSwap？

Uniswap and the AMM mechanism

Sushiswap began as a clone of Uniswap, Ethereum’s largest Dex, or a “community fork” of Uniswap. Dex and lending are two of the most important tracks in Defi, and Uniswap laid the groundwork for a successful Dex industry in 2019.

In traditional finance, transactions are often brokered through an order book model, where some users “make the order” and then some users “take the order” to complete the transaction between two parties. Early exchanges in the Defi space used a similar idea. Still, due to the low number of users, low liquidity, and lack of depth in these exchanges, the order book model could have performed better, with sluggish trading and significant slippage. In the order book model, professional market makers often earn arbitrage revenue by providing liquidity in the market, so is it possible to establish an algorithmic market maker based on the “Code is law” feature of Defi to provide liquidity to other real users? Uniswap has innovated on this basic model of aggregated trading by introducing the automated market maker (AMM) technology.

List of liquidity pools on the official Uniswap website

Each trading pair on Uniswap corresponds to a liquidity pool, and the x*y=c formula determines the price in the liquidity pool. Users can invest their digital assets in it, receive a certain amount of LP-Token representing the liquidity share, and receive market-making revenue for the corresponding percentage in the pool. This mechanism is simple yet effective, lowering the cost of management through code while significantly increasing trading speed. It reduces slippage while providing sufficient incentive for users to deposit their digital assets into the liquidity pool. With Uniswap’s success, more latecomers want to enter the market to get a piece of the pie, and Sushiswap is one of them.

The Token Economy of Sushiswap

As good as the Uniswap mechanism is, it has some problems. For one, it is unsafe for users to deposit funds into the liquidity pool. There is still the possibility of losses in the form of unpredictable losses, and the lower the total amount of liquidity in the pool, the higher the likelihood of risk; second, the incentive for the liquidity pool is based only on the amount of liquidity in the pool, and there is no specific compensation. In addition, the low trading volume of early liquidity pools and the low transaction fees make users less willing to join newly created liquidity pools, hindering the project’s sustainability.

Emulating Compund’s remarkable success in liquidity mining, SushiSwap has added a governance token, SUSHI, to Uniswap’s liquidity pool and AMM mechanism as an incentive to encourage early investor participation. Uniswap provides LP tokens to liquidity providers. However, this is not a governance token but a credential representing a share of liquidity in the pool. The SUSHI rewards for the liquidity pool become compensation for the Impermanent Losses and serve as an incentive for early investors.

SUSHI rewards for ETH/USDT liquidity pools on Sushiswap

Governance token SUSHI

The total number of SUSHI tokens isn’t limited. During the first 100,000 blocks of SUSHI’s launch (about two weeks), production was set at 1,000 per block but has since been reduced to 100 per block. The development team will be allotted 10% of the SUSHI supply for daily operation and auditing etc. Since token inflation was a growing concern, the Sushiswap community eventually voted to limit the number of SUSHI generated with each block. In the first two years, each block will produce 50 SUSHI. In the third and fourth years, each block will produce 25 SUSHI. And in the fifth year, each block will produce 10 SUSHI. On the other hand, to prevent the dumping of newly issued SUSHI, the tokens will be locked for an entire year after they are distributed.

Unlike Uniswap, where the fees are returned to LP-token holders, 0.25% of the fees on Sushiswap belong to LP-token holders, and the remaining 0.05% of the fees will be used to buy back SUSHI in the market. The higher the volume of transactions on Sushiswap, the higher the fee income will be, and the higher the number of repurchases of SUSHI will be, which will also increase the price of SUHI.

Since SUSHI’s price performance is inseparably linked to Sushiswap’s operations, it can also be seen as Sushiswap’s utility token. As the governance token for Sushiswap, SUSHI can be used to redeem the 0.05% fee described earlier and can also be used to vote on whether the project should open a new redemption pool and how to allocate SUSHI rewards in the existing pool.

The “Vampire Attack” on Uniswap

Another controversial move made by SushiSwap at its launch was the so-called “vampire attack” on Uniswap, which copied the underlying technology of Uniswap and made its own innovations, but this was not enough to make it successful. Sushiswap offers the opportunity to stake these LP tokens provided by Uniswap on Sushiswap so they can receive extra rewards paid in the SUSHI token. After a specific time (about two weeks), the Uniswap LP tokens are redeemed through a smart contract and converted into the corresponding LP tokens in the same liquidity pool on Sushiswap. The Uniswap LP token was converted to the corresponding LP token in the same liquidity pool on Sushiswap.

In addition to incentivizing users with tokens and copy-pasting Uniswap’s underlying code in this way, Sushiswap transferred Uniswap’s users to itself as is. After the launch of Sushiswap, nearly $1 billion in liquidity (about 60% of Uniswap’s liquidity at the time) was transferred from Uniswap to Sushiswap, and Sushiswap quickly gained a foothold in the decentralized exchange space.

There is no doubt that Sushiswap’s imitation and innovation of Uniswap were highly successful. The project gathered a lot of liquidity and users in a short time. It even pushed Uniswap to launch its governance token, UNI, with a hefty airdrop worth tens of millions of dollars. This, in turn, hit the advantage that SushiSwap had, as users deposited assets on Sushiswap only to earn high short-term returns, then quickly removed the assets and sold the SUSHI tokens, which led to a rapid decline in SUSHI token price and Sushiswap TVL.

Source: Research gate, Uniswap, Sushiswap TVL movement

(Sushiswap’s TVL was significantly higher than Uniswap’s from 2020.9.10 to 2020.9.18, i.e., nodes 4 to 5. And after the release of Uniswap’s governance token UNI on 9.18, Sushiswap’s liquidity quickly flowed back into Uniswap.)

Sushiswap’s Inner Controversy

In addition to significant pressure from competitors, Sushiswap has faced internal instability issues, including member disagreements, salary disputes, and high-level corruption.

The day before Sushiswap started its liquidity migration, Sushiswap founder “Chef” Nomi privately withdrew $14 million worth of SUSHI from the Sushiswap liquidity pool, causing SUSHI’s price to plummet by nearly 80% on the same day. Even though Nomi later stepped down as CEO of Sushiswap due to public pressure and returned the funds to the community, the market’s confidence in Sushiswap was shaken.

Sushiswap’s next leader was another founder who gave the project a brief turnaround - 0xMaki. 0xMaki came on board and led the project’s rapid growth on a community-driven basis, with the token price steadily rising and TVL gradually climbing. However, in September 2021, 0xMaki suddenly announced his resignation for personal reasons, causing the project’s operations to fall into chaos again, with the coin price and market share going down. Community opinion suggests that 0xMaki resigned because a partnership of other management ostracized him. In the aftermath, some core developers from the Sushiswap team also left, making Sushiswap’s operations even worse.

theblockcrypto.com

Conclusion: Uni to the left, Sushi to the right

Say Uniswap is driven by VCs, and the community drives Sushiswap. Backed by VCs, Uniswap’s airdrop distributed only 60% of its tokens to the community, leaving 21.5% reserved for the team and 17.8% for investors. Sushiswap, on the other hand, distributed 90% of its tokens to the people, with the project retaining only 10% of the tokens. This difference also reflects, to some extent, the difference in development strategies between Uniswap and Sushiswap. Compared to Uniswap, the threshold for participation in governance is lower at Sushiswap, and the distribution of SUSHI tokens is more decentralized.

Uniswap has been updated to version V3, and a V4 upgrade is planned. Sushiswap offers a range of products in addition to the basic Swap functionality, including the lending platform Kash, Miso IDO Launchpad, and the Shoyu NFT marketplace, building a more comprehensive ecosystem of dApps. In addition, Sushiswap has made innovations in the AMM mechanism by introducing the new Trident framework, which uses the new constant equation x³y+y³x=k model to reduce transaction slippage further.

Figure: Sushiswap lending platform Kashi

On April 26, 2022, SushiSwap announced the release of the SushiSwap 2.0 community proposal and the launch of SushiSwap’s future development roadmap. On October 3, the Sushiswap community voted to elect Jared Grey, former CEO of Eons Finance, as the new CEO of Sushiswap with 83% support.

However, as soon as Grey took office, rumors surfaced on social media that he had allegedly been involved in Rug Pull and other fraudulent projects at Encore Finance, casting new uncertainty over Sushiswap’s future.

Compared to top decentralized exchanges like Uniswap and Curve, Sushiswap needs to catch up regarding TVL, average daily trading volume, and other data. In this case, it is good that the project has chosen to take the initiative and seek a turnaround. But after all the turmoil, it remains to be seen if SushiSwap, which is already among the oldest Defi apps, can break through the deadlock.