SushiSwap CEO Jared Gray unveiled a proposal to change the tokenomics of the SUSHI token on Dec. 30 to revitalize the protocol amid a liquidity crisis.
On December 6th, Gray caused a furore in the SUSHI community after announcing that the project’s treasury would only last 1.5 years. At the time, Gray proposed that 100% of fees earned by SushiSwap be diverted to Kanpai, the project’s treasury, for a year or until new tokenomics are launched.
The decentralized exchange (DEX) pushed the fee redirection proposal and suffered a $30 million loss over the past 12 months to liquidity provider (LP) incentives. According to Gray, this proved that SushiSwap’s incentive mechanism is “unsustainable” and needs to be recalibrated.
This is because the current tokenomics disproportionately distributes its fee income and issuance premiums to non-LPs as per the formal tokenomics redesign proposal. Furthermore, since less than 2% of users deploying xSUSHI provide liquidity in any pool, the proposal states:
“Strengthening liquidity in Sushi’s pools requires a rebalancing of token mechanics that properly balance LP activity with most rewards and value gains.”
The tokenomics proposed by Gray aims to reward liquidity growth through a “holistic and sustainable reward mechanism that scales with volume and fees.” In addition to increasing liquidity, the new tokenomics model aims to create more value for SUSHI and “promote the maximum value for all stakeholders”.
Proposed changes to the SushiSwap tokenomics
The new tokenomics model will introduce timelocks for issuance-based rewards, a token burn mechanism and locked liquidity for price support.
The main proposed change under the new model is that SUSHI (xSUSHI) with stakes will no longer receive a share of fee income. Instead, according to the new proposal, xSUSHI will only receive issuance-based rewards paid in SUSHI.
The emission-based rewards are based on time lock levels – the longer the time lock, the higher the rewards. While users can withdraw their collateral before the time limits expire, early withdrawals will result in the forfeiture of rewards.
Additionally, LPs receive a 0.05% share of swap fee income, with the highest shares going to the highest volume liquidity pools. This will help reward LPs in proportion to their contribution to liquidity.
LPs can also choose to lock up their liquidity for additional issuance-based rewards, but will lose the rewards if they withdraw their tokens early.
In addition, SushiSwap will use a floating percentage of the swap fee of 0.05% to buy back and burn SUSHI. Burning tokens refer to the removal of tokens from the circulating supply by sending them to an address from where they become irretrievable to anyone.
Forfeited rewards will be burned if xSUSHI and LPs prematurely withdraw their collateral from their timelocks. According to Gray, this will have a significant deflationary effect on the supply of SUSHI as time lock rewards are paid after maturity, while the burn under the new model occurs in real time if a large amount of collateral is canceled early.
The DEX will also use a portion of the 0.05% swap fee to lock in liquidity for price support, the new tokenomics proposal states.
To reduce inflation, the DEX will bring issuance for the SUSHI token to 1-3% annual percentage return (APY). The aim is to balance the supply with the buybacks, burns and liquidity locks.
According to the proposal, all changes aim at one goal:
“…incentivize long-term participation in the sushi ecosystem while reducing the number of extractive participants.”
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