First Look into SushiSwap

Summer 2020 has been anything but ordinary for the decentralized finance (DeFi) community. It saw a huge appreciation in price for DeFi tokens and this could all be linked to the main contributing factor for this explosive trend — the yield farming craze. Simply put, yield farming in DeFi allows one to earn rewards with their cryptocurrency by participating in liquidity mining programs introduced by protocols. In most cases, it involves providing funds into liquidity pools of decentralized exchanges (DEXs) and rewards received are usually in the form of governance tokens.

Many would remember that Compound Finance was the first to start off this craze in June when they launched their own governance token, COMP and distributed it to users who lend and borrow assets on their platform. The price of the token skyrocketed from $78 to $336 and the total value of funds locked in Compound went from $100 million to nearly $600 million in a week as different strategies were used to capitalize on earning as much COMP as possible. However, the first form of yield farming on DeFi could date back to July 2019 when Synthetix used SNX rewards to incentivize liquidity for the sETH/ETH pool on Uniswap.

With the evident success and benefits that yield farming programs could bring to a protocol, the potential profits to be made also invited an influx of bad actors who are trying to take advantage of this craze. Due to the open-source nature of cryptocurrency, there were many forks of popular DeFi platforms that sprang up. There was obviously no value tied to the governance token of these forks and the price is only supported by later entrants who are attracted by the high APYs, similarly to a Ponzi scheme. This soon became a game of cat and mice where early participants will farm these tokens and dump them on later entrants at a high price. The early participants abscond with their profits and jump to the next fork while later entrants have to stomach the loss and watch as the unsustainable inflationary rewards crash the price. This inevitably led to the end of DeFi summer.

SushiSwap was looking to be like one of those that are banking on this latest craze but it has stood out among the crowd of forks and its journey from the beginning is one heck of a tale to be told.

Origin

If you are dabbling in DeFi, there is a high chance that you would have come across/used Uniswap. Uniswap is a decentralized exchange built on Ethereum for exchanging tokens using the automated market maker (AMM) model through liquidity pools instead of the usual order book trading. Liquidity providers (LP) deposit an equal value of 2 tokens into their preferred pool and receive liquidity tokens that represent their share of the pool. The pool takes a cut of 0.3% for every trade that goes through it which is then split among the LPs.

It has established itself as one of the pioneers in DeFi and demonstrated its potential to rival its centralized counterparts in daily trading volume. SushiSwap is a fork of Uniswap and works just the same except with the introduction of their very own governance token, Sushi.

At the point of SushiSwap launch, there is no native token for Uniswap.

Enter the Sushi Bar

The first SushiSwap Menu in its early days

SushiSwap was launched by their pseudonymous founder, Chef Nomi on 28th August 2020. The launch caught the attention of everyone in the DeFi community as it heavily marketed itself as an evolved community-oriented version of Uniswap and has features that could enhance the design of the protocol, bringing more benefits to LPs and users of SushiSwap. The token gave holders governance rights to vote on proposals in improving the protocol. In a sense, SushiSwap “belonged” to the community.

To bootstrap liquidity and entice liquidity providers onto SushiSwap, the Sushi token was rewarded on top of the 0.25% of swap fees generated by the pool that the LPs are participating in. In order to participate in this liquidity mining program, LPs have to stake their Uniswap liquidity tokens into SushiSwap contracts and be prepared to migrate their liquidity from Uniswap to SushiSwap in 2 weeks. The rewards was set up for 13 liquidity pools and is cleverly targeted at Uniswap’s largest liquidity pools (E.g. USDC-ETH/USDT-ETH/DAI-ETH) and the liquidity pools of popular DeFi tokens (E.g. SNX-ETH/COMP-ETH/YFI-ETH). This rallied the DeFi community together and sent them into a farming frenzy with its insanely attractive yields. As a result, every DeFi token listed in the program enjoyed large gains in price action as everyone wanted a slice of the sushi.

Token holders who are willing to stake their Sushi are entitled to another 0.05% of the swap fees generated by the whole protocol. These fees are used to purchase Sushi daily which will be proportionately divided according to your staking share. It garnered immense popularity and was a spectacular feat — the total value of funds locked in SushiSwap contracts crossed 1 billion in less than 4 days since its launch. The token more than tripled its value from an initial price of $2.59 to an all time high of $8.84, according to CoinGecko. The swift listing of Sushi on major centralized exchanges such as Binance and FTX also brought much needed exposure to bring on the rally.

No one could resist the temptation of these delicious Sushi being served. Was this a billion dollar liquidity heist?

Rotten Sushi?

The launch of SushiSwap seems to be perfectly in line with the change that the community would like to see — fairer distribution of tokens towards the community rather than founders with large premines or funds/VCs who got in early with preferred terms. As people in the community take sides in the debate whether SushiSwap was actually something that provided value to DeFi or just a vampiric attack in draining liquidity from Uniswap, one thing is clear. Chef Nomi stands on the side of the community and is an advocate for putting the interests of the community first. Or so it seems.

There was a development fund set up to ensure long term viability of the project with 10% of every Sushi distribution set aside for the developers. The success of SushiSwap probably exceeded Nomi’s expectations and went to his head. He got into an argument with Uniswap’s founder Hayden Adams on Twitter.

However, his comment aged terribly. Just a few days after the incident, on 5th September 2020, Chef Nomi sold his share of Sushi tokens from the development fund for roughly 37,400 ETH in 2 transactions which amounts to approximately $13 million at the point of sale. His stance on the matter was that he was worthy of his share due to his contributions. By selling his tokens, he could stop caring about the price and focus on the technicality of the migration without the pressure of price movement.

Screenshot of Chef Nomi’s conversation on Discord

Of course, this decision did not bode well with the community and is a glaring sign of an exit scam. It also raised the question of trust in anonymous teams and the betrayal tarnished the purpose that SushiSwap stood for. This was immediately reflected in the price of Sushi when it fell by more than 70% in a day from $4.58 to $1.20. The situation was certainly not looking good and its fate would seem to end up like one of the many useless forks.

A New Chef in Town

Sam Bankman-Fried

Chef Nomi was still in sole control of the keys to the SushiSwap contract and was planning to proceed with the liquidity migration to SushiSwap. But after the stunt that he pulled, no one trusted him to go through with the migration. FTX’s CEO, Sam Bankman-Fried gave a long rant on Twitter on the SushiSwap saga and it was of the best interests of SushiSwap for Nomi to relinquish control of the keys and step down.

Seeing that the community was no longer on his side, Chef Nomi wasted no time in transferring the admin keys to Sam and gave his parting speech. Sam oversaw the process of liquidity migration and it went through as planned on 10th September 2020. He also transferred the control of the keys to the multi-sig contract so that any changes to the protocol or developer funds would require approval from the people elected by the community. SushiSwap has returned to the community and the Sushi Bar is set to open once again.

In a surprising turn of events, Chef Nomi returned all the ETH he gained from the sale to the project treasury, a week later. He acknowledged his mistakes and apologized to everyone in the community for the trouble he has caused.

That’s the last that we ever heard from him.

Current State

The slack was picked up from there and a new team was formed consisting of early contributors & volunteers with the community-appointed head chef, 0xMaki to push SushiSwap to greater heights after such a rocky start.

Onsen

SushiSwap is currently still incentivizing liquidity for its largest liquidity pools and liquidity pools of popular DeFi tokens with Sushi rewards. It encourages more liquidity to stick in SushiSwap to facilitate large trades with lower slippages which would ideally bring in more volume. There was an initiative known as Menu of the Week to bring in liquidity for newer tokens where Sushi rewards are distributed to liquidity pools voted in by the community and the menu rotates weekly.

Onsen is a new liquidity mining incentivization program that replaced Menu of the Week recently. The measures put in place are targeted at building meaningful relationships with up and coming projects while boosting liquidity and directing volume to SushiSwap. It would help to capture the trading volume of hot trending tokens and projects could consider setting up their main liquidity pool on SushiSwap. This is a win-win situation for all parties involved. SushiSwap gains traction and becomes an ideal platform to cultivate new projects. Projects can leverage on the expertise/support of SushiSwap’s team and rely on extra yield from Sushi rewards to ensure a smooth launch and gain more exposure to the wider DeFi community.

This revamp is a positive change for the long term and would ultimately increase returns of staking Sushi with the expected rise in exchange volume.

Vesting of rewards

Sushi’s Emission Schedule

2/3rd of the Sushi rewards earned from providing liquidity to the eligible pools is locked for 6 months. The other 1/3rd is immediately accessible from the moment it is earned. This helps to relieve constant selling pressure of tokens into the market during this initial phase of high inflationary rewards used to bootstrap liquidity on SushiSwap. By doing so, it allows sufficient time for the team to work on the project and come up with ways to accrue value to the Sushi token by building on SushiSwap.

Merger with Yearn Finance (YFI)

Yearn Finance has made its name in the DeFi household back in summer when it created the narrative around fair launches and focused on innovative strategies to maximize yield for its users. It has since been rapidly expanding its ecosystem by partnering with different projects to cover all aspects of DeFi. SushiSwap is one of them as it is mutually beneficial for both projects due to their overlapping functionalities. Other projects in the ecosystem are also supporting SushiSwap which includes implementing more trading features, having insurance coverage, etc. We can look forward to more synergistic relationships within the ecosystem.

xSushi on AAVE?

xSushi is a passive yield bearing token received when staking Sushi in the Sushi Bar. As mentioned, the yield comes from the 0.05% swap fees taken from every trade in SushiSwap and is converted to Sushi. xSushi will be equivalent to more Sushi over time and the returns are dependent on the volume of SushiSwap. There is no vesting period unlike the Sushi rewards that are distributed to liquidity providers.

A proposal was submitted on AAVE forum to list xSushi as a collateral. AAVE is one of the leading platforms on Ethereum for lending/borrowing activity and has a great reputation in DeFi. If approved, it would bring positive publicity to the project and give rise to more yield-generating possibilities with the xSushi collateral. Stacking yield? Yummy!

Binance Staking

These rates are subjected to changes

Binance has recently offered its users to lock up Sushi with them to earn interest of up to 24.49%, annualized. Interest rates differ slightly based on the duration of the lock-up period and interest is paid out daily in Sushi. This provides great convenience to those who are not familiar with transacting on Ethereum although it is still recommended to stake Sushi in the Sushi Bar to enjoy better returns with no lock up. This alternative laid out by Binance is a great testament to the legitimacy of the project and is user friendly.

Trading Volume

Taken as of 3rd Jan 2021

The charts shown are at the time of writing. SushiSwap has reached its All-Time-High in daily trading volume of $427M since its inception which is mostly attributed to the huge surge in the price of ETH. It is a great sign that both the exchange liquidity and weekly volume has been steadily growing despite the monthly decrease in emission schedule. The real winner? Sushi stakers. The fees earned in the last 24 hours are around $215K (~$79M in fees annualized) which are being used to purchase Sushi from the market (No pun intended) to be distributed among the stakers. This is just a glimpse of the possible returns as SushiSwap grows bigger.

Closing Thoughts

While SushiSwap was almost single-handedly ruined due to one’s greed, it is nothing short of a miracle for the community to band together and revive the project to where it is now. Chef Nomi’s action has left a bad taste and tarnished the image of Sushi, with many still associating it as a scam. However, the perception of Sushi is starting to change for the better as the team continues to work hard behind the scenes and respond to community demands in order to propel SushiSwap forward. All eyes are on the launch of Sushi’s upcoming product, BentoBox — an advanced isolated pair lending solution which allows users to create lending pairs for any tokens and as a result being able to perform margin short on a variety of tokens. A percentage of the interest proceeds is also converted to Sushi to be distributed to stakers which is an additional revenue stream for xSushi, further increasing yield.

As we head into 2021, decentralized exchanges will continue to take up market share from centralized exchanges as anyone can create a liquidity pool for any token pair to start trading whereas the latter have to go through a strict listing process and trading activity is limited to the assets listed. This is the beauty of a permissionless protocol. Ethereum Layer 2 scaling solutions will play a crucial role in increasing usage of DEXs as high gas fees are pricing out smaller users.

SushiSwap is a grassroots driven version of DEX and it is demonstrated in Sushi’s case that fostering a community did wonders for the project, considering how much it has achieved in the last few months. The Sushi token represents an ownership stake in a fast-rising community-owned DEX and can be used to generate passive yield through staking. The value of the token is directly correlated to SushiSwap’s volume — there are anticipated features that the team has come up with to increase trading volume. I am excited for the future developments of SushiSwap and it is definitely one of the DeFi projects to look out for in 2021.

My favourite kind of Sushi? A pay roll.

Resources

SushiSwap docs | SushiSwap Analytics | SushiSwap Forum| SushiBoard | Twitter | Discord | Additional reads on upcoming features — MISO, Gusoku, SushiSwap V2, Limit-Orders

Stay tuned to more content coverage on DeFi products and follow me on Twitter!


First Look into SushiSwap was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.