SushiSwap is the jealous twin of Uniswap. After pioneering decentralized exchanges (DEXs), Uniswap sparked a DEX race. SushiSwap was one of these race participants.
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 name to clarify their purpose. The universal token exchange – Uniswap – was proposed by Vitalik Buterin in 2016, but implemented by Siemens engineer Hayden Adams and went live in November 2018.
The open-source protocol allowed anyone to list their cryptocurrencies as ERC-20 compatible tokens on Ethereum without permission. Users would provide liquidity to token pairs, allowing exchanges without the need for a central organization to provide 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 inextricably linked to the SushiSwap coup. Source: DeFiLlama
Since the Uniswap code is open source, it was possible to perform this hard fork. This means that the developers optimize the code so that it no longer works under the existing protocol. Instead, it branches into a new one, leaving the original one intact.
This has happened many times, even with the first cryptocurrency, Bitcoin. Since its launch in 2009, Bitcoin has been hard forked more than a hundred times. But the situation with SushiSwap was a little trickier:
- To divert existing liquidity providers (LPs) from Uniswap, the new SushiSwap clone issued SUSHI tokens as yield rewards for LPs.
- To further realize its ambition of becoming the next big DEX, SushiSwap attracted Uniswap LPs to deposit their tokens in exchange for SUSHI.
- When Uniswap tokens are then exchanged for SUSHI, SushiSwap would gain Uniswap's liquidity.
Upper hand
In other words, SushiSwap carried out a vampire liquidity mining attack on Uniswap. This SushiSwap migration was quite successful as more than half of Uniswap LP tokens were converted into SUSHI. Without a black swan event – a crypto market crash – SushiSwap would likely have come out on top.
Sharp asset devaluations cause many weak-willed investors to exit the market. This is exactly what happened to the head of SushiSwap, Chef Nomi. He paid out $14 million to SUSHI, leading many investors to believe that SushiSwap itself was just an exit scam and not a real Uniswap hard fork.
Due to this sentiment, SUSHI further reached the depreciation floor. Amid this chaos, Chef Nomi handed control of the protocol 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 Uniswap tokens from LP to SUSHI to hijack Uniswap's liquidity. In the end, Uniswap prevailed when it released its UNI utility and governance token in September 2020. To take revenge on SushiSwap, Uniswap developers airdropped 400 UNI to wallets that previously interacted with the protocol.
This brought investors back to Uniswap, giving the company a TVL eight times higher than SushiSwap as of September 1, 2022.
How does SushiSwap work?
After this acquisition saga, you may 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 exchange ETH for USDC, one would move to an ETH/USDC liquidity pool. This is a smart contract that locks human-supplied coins, either ETH or USDC. Therefore, these people are called liquidity providers (LPs). In a centralized system, an institution such as a bank would provide this liquidity so that one currency can be exchanged for another.
Source: SushiSwap
In a decentralized exchange like SushiSwap, the Automated Market Maker (AMM) protocol replaced banks by connecting traders with the funds of liquidity providers. LPs are incentivized to provide liquidity as they receive 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 forked by Uniswap on the Ethereum blockchain. Since then, SushiSwap has expanded 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.
However, the majority of SushiSwap's liquidity is still contained in Ethereum at 73%. Additionally, SushiSwap has expanded beyond its DEX origins into lending – Kashi.
Instead of providing liquidity for exchanging tokens, Kashi is a smart lending contract. It works on the same principle: LPs lock their tokens in liquidity pools, while borrowers access them to obtain a loan once they have locked their own tokens as collateral. In addition, borrowers pay an APR depending on the token pair.
These are just a few of the token pairs on SushiSwap’s Kashi that serve as liquidity pools for borrowing. Source: SushiSwap
In return, LPs receive interest rates (offered APR) on these secured loans. If the borrower does not pay on time, the smart contract automatically withdraws the collateral so that the LP is not subject to forfeiture. This is called the liquidation price. For example, if someone were to borrow 1,000 USDC (equivalent to $1,000) in exchange for 1 ETH collateral, the liquidation price would be 817 USDC.
Source: SushiSwap
In this particular token liquidity pool, ETH/USDC, the loan-to-value ratio (LTV) is 75%, which represents the percentage of collateral compared to the amount borrowed. So if you were to borrow 10,000 USDC, you would have 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 that is popular among confident crypto traders. To strengthen their market position, traders can use their credit – increase it from 0.25 times to 2 times. For example, 1.25x leverage would increase the loan from 1,000 USDC to 2,901 USDC.
Source: SushiSwap
Source: SushiSwapOf course, such a leveraged loan would require 2.8 ETH collateral, and if it exceeds 75% of collateral, it would be liquidated. The consequence of this is clear: if the price of the collateral, in this case ETH, falls in the market, the lender receives the collateral.
SushiSwap members rejoice as Whale is freed from the token
After designing the Sushi reform plan, Arca goes to the exit
In addition to Kashi, SushiSwap also offers SushiBar. This is the liquidity reserve of the protocol. To provide additional security against extreme market conditions such as: For example, in case of severe price fluctuations that could liquidate a number of collateral assets, Sushi users can lock their SUSHI tokens into SushiBar's smart contract.
In return, they receive a fee of 0.045% of all swaps and also receive a governance vote on the protocol's development proposals.
Finally, over 15,000 token pairs available on SushiSwap use Chainlink as the network's oracle, feeding off-chain data into on-chain smart contracts, such as asset prices.
SushiXSwap
In July 2022, SushiSwap updated its protocol with SushiXSwap. This is a cross-chain DEX that, in addition to Ethereum, enables token exchange across multiple networks: Optimism, Arbitrum, Fantom, Avalanche Binance Chain and Polygon.
Built on the Layer 0 Stargate protocol, SushiXSwap acts as a unified user interface that eliminates the cumbersome nature of multichains and bridges between networks. This is made possible by BentoBox, the smart contract that serves as a central vault for SushiSwap's entire dApp ecosystem.
SUSHI Tokenomics
As a governance and utility token, there is a maximum supply of 250 million SUSHI coins. Of these, 51% are in circulation. Liquidity providers receive SUSHI when traders exchange tokens as a 0.25% fee, proportional to LP's share of a given liquidity pool.
At its peak, 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, which allows for greater customization in liquidity mining. Furthermore, the people behind SushiSwap are still pseudonymous.
SUSHI tokens are also available on centralized exchanges: Binance, OKE and Huobi Global.
How to access SushiSwap
As with any dApp, the easiest way to access and borrow the SushiSwap token exchange is through the MetaMask wallet:
- Go to the SushiSwap app.
- Click “Connect to a wallet” in the top right corner.
- Confirm MetaMask password and access.
With the wallet connected and charged, you can now use it to deposit or withdraw funds from SushiSwap services – Trade, Liquidity, Kashi, Sushibar. At a glance, you can see your SushiSwap status in the “Portfolio” drop-down menu.
Series Disclaimer:
This series article is intended only as a general guide and information for beginners exploring cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. For all legal, business, investment and tax implications and advice, you should consult your advisors. The Defiant is not responsible for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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