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SushiSwap Overview and Origin
SushiSwap is an Ethereum-based automated market maker (AMM). An AMM is a form of decentralized exchange (DEX) that incentivizes users to participate in providing liquidity for the exchange platform. In other words, AMMs enable users to profit by acting as counterparties that help meet the platform’s order demands — buying tokenized assets from users looking to sell, and selling them to users looking to buy. To facilitate these transactions without a centralized governing authority, SushiSwap relies on liquidity pools where users can lock up assets in smart contracts from which traders can buy or sell assets. SushiSwap is a community-run project that relies on its native utility token, SUSHI, for governance and voting on major protocol developments.
For more context on what makes SushiSwap popular, it is helpful to understand how SushiSwap set itself apart from Uniswap, the original protocol from which SushiSwap copied its code in September 2020. Because pseudonymous developer Chef Nomi started it as a direct clone of Uniswap, SushiSwap and Uniswap share a nearly identical source code, except for notable community-oriented features such as staking rewards and a governance token added by SushiSwap. Chef Nomi eventually sold the majority of the SUSHI tokens he had gained, leading to some controversy in the SushiSwap community. However, Chef Nomi’s departure from the project seems to have served as a catalyst for even more of a community-driven approach, as without the involvement of the founding figurehead, the community has been taking an increasingly active role in the project’s development.
The birth of SushiSwap underscores the “decentralized” aspect of decentralized finance (DeFi), as it shows how the DeFi community can dynamically adapt and pursue an activist agenda, redirecting its activity to competitors that offer more agreeable economic incentives and more inclusive governance. This lesson was not lost on Uniswap, which eventually released its own governance token, UNI, and implemented similar community-centric features to regain some of the transaction volume it initially lost to SushiSwap. SushiSwap continues to see major growth alongside its counterpart, with both platforms serving as two of the most popular DEXs available to DeFi traders.
SushiSwap Governance and SUSHI Token
SushiSwap initially differentiated itself from Uniswap by implementing a decentralized system of community governance. The community governs the protocol and makes major structural changes via forum discussions, official proposals, and community voting. Smaller operational decisions are handled by a pseudonymous SushiSwap developer named 0xMaki and a core team of supporting developers. The platform’s structure, along with its core team, also were voted in by the community. As a relatively new project, SushiSwap’s governance structure is somewhat in flux as it seeks to establish a bonafide decentralized autonomous organization (DAO). While the first iteration of the SushiSwap platform launched within a matter of weeks, its core members anticipate a much longer time horizon to create a DAO.
The cornerstone of SushiSwap’s community governance is its native SUSHI token, which allows holders to participate in voting on platform proposals. SUSHI is an ERC-20 token with a maximum supply of 250 million. Forty SUSHI are minted with each new block — and all 250 million tokens are expected to be minted by November 2023.
SushiSwap Structure and Economic Model
SushiSwap’s DEX is powered by an AMM mechanism. Anyone can become a liquidity provider (LP) on the SushiSwap platform by depositing assets into a liquidity pool. In exchange, users will receive SushiSwap Liquidity Provider (SLP) tokens. SLP tokens represent proportional ownership of the liquidity pool for which the provider supplies assets; they are redeemable for the originally deposited assets at any time.
Anyone can use SushiSwap’s user-facing web applications to swap tokens on the SushiSwap DEX with a simple user interface. When exchanging tokens, a 0.3% fee is charged with 0.25% going back into the liquidity pool. This means that as more exchange transactions are performed, the total supply of tokens in each pool increases incrementally, thus also increasing the value of the SLP tokens that represent proportional ownership of the liquidity pool itself. This process of generating yield is the incentive for liquidity providers to facilitate liquidity on the SushiSwap platform.
The remaining 0.05% of SushiSwap’s exchange fee fuels the platform’s staking mechanism, SushiBar, providing yet another yield farming opportunity for platform users. SushiBar lets users stake the native SUSHI token in exchange for xSUSHI, a separate asset that appreciates with the 0.05% exchange fee dividends of the exchange platform. This enables SushiSwap users to generate yield even when they are not actively providing liquidity to pools. This is in contrast to Uniswap’s structure, which awards all 0.3% of the exchange fees to LPs.
SushiBar staking works as follows: The 0.05% exchange fee is collected in the form of SLP tokens for the relative pool and deposited in a rewards smart contract. The rewards contract is called at least once per day and all the SLP tokens are sold for SUSHI. The newly purchased SUSHI is then distributed among xSUSHI holders in the SushiBar pool as a staking reward, which means that their xSUSHI is now worth more SUSHI than when they deposited it.
Users can also partake in another layer of yield farming. You can deposit the SLP tokens you received from being an LP into various “farms” that generate SUSHI rewards with each new block. When users generate these yield farming rewards, two-thirds of the SUSHI is vested for six months, beginning from when the SUSHI was earned. In other words, users can earn LP rewards for staking digital assets in exchange for LP tokens, and can earn further rewards by staking the LP tokens as well. This networked, “virtuous cycle” approach is a popular DeFi strategy.
SushiSwap Future Developments: Lending
SushiSwap is currently working to develop BentoBox — a lending solution similar to Compound or Aave — which would allow users to deposit digital assets as collateral and borrow other assets against them. With BentoBox, each lending pair is designed to be isolated, as is its risk profile. This model stands in contrast to other popular DeFi lending platforms where users can deposit a variety of assets and borrow several different assets in return, in which case the risk increases with each additional asset involved in the loan.
In many traditional crypto-lending models where a basket of digital assets is used as collateral, the risk that any one borrower presents to the platform is tied to the risk of the borrower’s most unstable collateralized asset. A drop in that asset’s liquidity and/or price might jeopardize the entire loan, and could require the more stable assets in the basket to be sold to pay down the loan. In contrast, BentoBox’s one-to-one structure means that some lending pairs (such as those involving low-cap altcoins) will have higher risk and higher interest rates, while other lending pairs (such as those involving high-cap coins and stablecoins) will have lower risk and lower interest rates.
Further, in alignment with SushiSwap’s community-centric ethos, practically anyone will be able to create a lending pair — leaving the available pairs up to the community’s discretion based on its consensus about which pairs are safe enough to support. BentoBox also aims to implement a significant degree of flexibility — with support for both on-chain and off-chain oracles, liquid interest rates, smart contracts optimized for lower gas fees, and the ability to execute flash loans.
Although SushiSwap’s BentoBox has yet to materialize fully, it has the potential to introduce SushiSwap’s trademark customizability and community-driven nature to the realm of DeFi lending in the future. Another such community-driven plan in the works is the integration of many SushiSwap features and functionalities into the Solana blockchain ecosystem, which would expand SushiSwap’s liquidity solutions to include both Ethereum-based LP tokens and Solana-based LP tokens.
SushiSwap has made, and continues to make, significant and proactive efforts to prioritize the wants and needs of its community. In doing so, the platform has differentiated itself from many other DEXs. With community focus as a primary driver, SushiSwap bolsters the impact its users can have on the protocol’s future while providing permissionless AMM services. Overall, SushiSwap is one of DeFi’s most popular DEXs.