SushiSwap is Uniswap’s jealous twin. After pioneering decentralized exchanges (DEXs), Uniswap sparked a DEX race. SushiSwap was one of those racers.
Why did SushiSwap become popular and what does it offer compared to Uniswap? And should you become a sushi “chef”? Find out in this SushiSwap overview.
Origin and Purpose of SushiSwap
SushiSwap cannot be understood without taking a look at Uniswap. Both DEXs use their names to explain their purpose. Proposed by Vitalik Buterin in 2016 but implemented by Siemens engineer Hayden Adams, universal token swapping – Uniswap – went online in November 2018.
The open-source protocol allowed anyone to list their cryptocurrencies as ERC-20 compliant tokens on Ethereum without permission. Users would provide liquidity for token pairs so that the exchange would be possible without a central organization doling out liquidity.
Just before Uniswap reached the $300 million TVL milestone, a pseudonymous developer named Chef Nomi decided to fork the Uniswap code and create a Uniswap clone – SushiSwap. This happened on August 28, 2020.
The development of Uniswap as a DEX is inseparable from the SushiSwap coup. Source: DeFiLlama
Since the Uniswap code is open source, it was possible to perform this hard fork. That is, developers tweak the code so that it no longer works under the existing protocol. Instead, it branches into a new one, leaving the original intact.
This has happened many times, even with the first cryptocurrency, Bitcoin. Since its inception in 2009, Bitcoin has been hard forked more than a hundred times. But the situation with SushiSwap was a bit trickier:
- To pull existing liquidity providers (LPs) away from Uniswap, the new SushiSwap clone issued SUSHI tokens as yield rewards for LPs.
- To further pursue its ambition to become the next big DEX, SushiSwap enticed Uniswap LPs to escrow their tokens in exchange for SUSHI.
- If Uniswap tokens are then swapped for SUSHI, SushiSwap would gain liquidity from Uniswap.
upper hand
In other words, SushiSwap ran a vampire liquidity mining attack on Uniswap. This SushiSwap migration was quite successful as more than half of the Uniswap LP tokens were converted to SUSHI. The SushiSwap would likely have taken over had it not been for a black swan event – a crypto market crash.
Sharp asset depreciations cause many weak-willed investors to flee the market. That’s exactly what happened to SushiSwap’s chef, Chef Nomi. He paid out $14 million to SUSHI, leading many investors to believe that SushiSwap itself was just an exit scam rather than a legitimate Uniswap hard fork.
Due to this sentiment, SUSHI continued to hit the depreciation floor. Amidst this chaos, Chief Nomi handed control of the protocol over to Sam Bankman-Fried, the billionaire crypto entrepreneur and FTX CEO.
To save SushiSwap, Bankman-Fried conducted another vampire mining attack on Uniswap worth nearly $1 billion, converting LP’s Uniswap tokens into SUSHI to hijack Uniswap’s liquidity. In the end, Uniswap prevailed when it issued its UNI utility and governance token in September 2020. To get back at SushiSwap, Uniswap developers dumped 400 UNI into wallets that had previously interacted with the protocol.
This brought investors back to Uniswap, leaving it with a TVL eight times higher than SushiSwap as of September 1, 2022.
How does SushiSwap work?
After this takeover saga, you might already understand how SushiSwap works, but it always helps to flesh out the details. SushiSwap allows people to become liquidity providers so other people can exchange tokens within token pairs.
For example, if one were to swap ETH for USDC, one would go into an ETH/USDC liquidity pool. This is a smart contract that locks coins provided by people, either ETH or USDC. Hence, these individuals are called Liquidity Providers (LPs). In a centralized system, an institution such as a bank would provide this liquidity so that one currency could be exchanged for another.
In a decentralized exchange like SushiSwap, the Automated Market Maker (AMM) protocol replaced banks by matching traders to liquidity provider funds. LPs have an incentive to provide liquidity because they earn staking rewards. Specifically, a 0.25% fee on all token swaps proportional to LP’s share of the liquidity pool.
Therefore, SushiSwap has two main functions: trading (swapping tokens) and liquidity (adding funds to liquidity pools), allowing token swapping.
Additional features of SushiSwap: Kashi and SushiBar
SushiSwap was originally hard-forked by Uniswap on the Ethereum blockchain. Since then, SushiSwap has grown to over a dozen Layer 2 scalability networks and competitive chains: Arbitrum, Polygon, Avalanche, Gnosis, Harmony, Celo, Fantom, Moonriver, BSC, Fuse, Telos, OKExChain, Heco, and Palm.
Nonetheless, the majority of SushiSwap’s liquidity is still contained on Ethereum at 73%. Additionally, SushiSwap has expanded beyond its DEX origins into lending – Kashi.
Instead of providing liquidity for swap tokens, Kashi is a smart lending contract. It works on the same principle – LPs lock their tokens in liquidity pools while borrowers tap into them to get a loan once they have locked their own tokens as collateral. In addition, borrowers pay the APR depending on the pair of tokens.
In return, LPs receive interest rates (bid APR) from these secured loans. If the borrower fails to pay on time, the smart contract automatically withdraws this security so the LP is not left in the lurch. This is known as the liquidation price. For example, if one were to borrow 1,000 USDC (equivalent to $1,000) against 1 ETH collateral, the liquidation price would be 817 USDC.
In this particular token liquidity pool, ETH/USDC, the loan-to-value ratio (LTV) is 75%, which is the percentage of collateral versus amount borrowed. So if you were to borrow 10,000 USDC, you would need to deposit 4.8 ETH as collateral, which is 75% of 6.4 ETH (worth $10,000).
An additional option is in the form of leverage. This is an extremely risky trading strategy popular among confident crypto traders. To strengthen their market positions, traders can use their loan – from 0.25x to 2x boost. For example, 1.25x leverage would increase the loan from $1,000 USDC to $2,901 USDC.
Source: SushiSwapOf course, such a leveraged loan would require 2.8 ETH of collateral, and if it exceeds 75% of the collateral, it would be liquidated. The implication of this is clear – if the price of the collateral, in this case ETH, falls in value in the market, the lender gets the collateral.
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Besides Kashi, SushiSwap also offers SushiBar. This is the protocol’s staking liquidity reserve. To provide additional security against extreme market conditions such as B. wild price fluctuations that could liquidate a number of securities, Sushi users can stake their SUSHI tokens in SushiBar’s smart contract.
In exchange, they receive a fee of 0.045% of all swaps, in addition to receiving a governance vote on protocol development proposals.
Finally, over 15,000 token pairs available on SushiSwap use Chainlink as the network’s oracle, passing off-chain data to on-chain smart contracts such as: B. Asset Prices.
SushiXSwap
As of July 2022, SushiSwap has updated its protocol with SushiXSwap. This is a cross-chain DEX that allows token swap across multiple networks in addition to Ethereum: Optimism, Arbitrum, Fantom, Avalanche Binance Chain, and Polygon.
Built on the Layer 0 Stargate protocol, SushiXSwap operates as a unified user interface that eliminates the cumbersome nature of multi-chains and bridges between networks. This is made possible with BentoBox, the smart contract that serves as the central vault for SushiSwap’s entire dApp ecosystem.
SUSHI tokenomics
As a governance and utility token, there is 250 million SUSHI coins as the maximum supply. Of these, 51% are in circulation. Liquidity providers receive SUSHI when traders exchange tokens as a fee of 0.25% proportional to LP’s share of a given liquidity pool.
At its peak, the SUSHI price reached $23.38 in March 2021. A year later, it fell by over -90%. It’s safe to say that people flocked to Uniswap, especially after the V3 upgrade that allows for greater customization in liquidity mining. Also, the people behind SushiSwap are still pseudonymous.
SUSHI tokens are also available on major exchanges: Binance, OKE, and Huobi Global.
Access to SushiSwap
As with any dApp, the easiest way to access SushiSwap token exchange and lending is through the MetaMask wallet:
- Go to the SushiSwap app.
- Click on “Connect to wallet” in the upper right corner.
- Confirm MetaMask password and access.
With the wallet connected and funded, you can now use it to deposit or withdraw funds from the SushiSwap services – Trading, Liquidity, Kashi, Sushibar. At a glance, you can view your SushiSwap status in the Portfolio drop-down menu.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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