TL;DR: DeFi, the only place where unicorns and cartoon sushi face off in a battle for liquidity.
Uniswap has been one of the most successful DeFi protocols for swapping tokens on Ethereum. It was created by a small team of passionate builders who have made the code open-source and available for anyone to fork. And that’s exactly what SushiSwap did!
SushiSwap is a fork of Uniswap that adds the appetizing SUSHI token. It grants control over the protocol to holders and pays a portion of fees to them. Let’s see how you can get it on your plate!
As the Decentralized Finance (or DeFi) space evolves, an increasing number of novel financial platforms continue to emerge. We’ve seen how things like flash loans and yield farming (or liquidity mining) can be leveraged by investors to make money with their money.
Uniswap has solidified its position as one of the core DeFi protocols. In spite of its decentralized ethos and heavy reliance on smart contracts, however, users don’t have much of a say when it comes to its development direction.
SushiSwap, a new entrant to the field, promised to change that. And over $1 billion worth of value locked into the protocol – only a few days after launch – suggests that many would be interested in this change.
In this article, we’ll discuss the Uniswap fork that’s taking the crypto space by storm.
Before we start, it’s worth mentioning that if you don’t know what Uniswap is and how it works, you’ll have a hard time understanding SushiSwap.
In short, Uniswap is a decentralized exchange protocol that works without an order book. Instead of an order book, it utilizes a model called automated market-making (AMM), where liquidity providers add funds to liquidity pools. Before you think of jumping in to provide liquidity to SushiSwap, we highly recommend that you read our Uniswap article to understand all the details.
SushiSwap is a fork of Uniswap with some key differences – most notably, the SUSHI token. The token has two functions at launch: entitling holders to governance rights and a portion of the fees paid to the protocol. In a simplified way, SUSHI holders “own” the protocol.
Why has this spurred so much interest? Well, community governance is heavily intertwined with the DeFi ethos. The growth of liquidity mining (yield farming) as a valid method for token distribution has given rise to an abundance of new token launches. These aim to level the playing field for everyone involved with no premines, little or no founder allocation, and equal distribution based on the amount of funds supplied. The tokens distributed through these liquidity incentives then grant governance rights to token holders. In addition, we already know that SUSHI holders are also entitled to a portion of the fees paid into the protocol by traders.
OK, but what can token holders do with these governance rights? Well, anyone can submit a SushiSwap Improvement Proposal (SIP), which then SUSHI holders can vote on with their tokens. These can be minor or even major changes to the SushiSwap protocol. Instead of a more traditional team like Uniswap, the development of SushiSwap is in the hands of SUSHI token holders. A strong community can be a powerful asset for any token project, but this is especially true for a DeFi protocol.
It’s no secret that crypto is deeply rooted in the spirit of open-source. Many think that Bitcoin and a growing number of permissionless DeFi protocols act as new kinds of public goods in the form of software. Since these projects are so easily copied and relaunched with small changes, it’s only natural that this leads to competition between similar products. We could assume, however, that this should ultimately lead to the best products for the end-user.
It’s without a doubt that the DeFi space owes significant advancements to the Uniswap team. But we could see a future where even both Uniswap and SushiSwap (or other forks) flourish. Uniswap might remain at the forefront of innovation in the AMM space, while SushiSwap could provide an alternative that’s more focused on features that the community wants to see.
With that said, fragmenting liquidity between similar protocols isn’t ideal. If you’ve read our Uniswap article, you know that AMMs work best with as much liquidity in the pools as possible. If a lot of the liquidity in DeFi is split between many different AMM protocols, that could lead to a worse experience for the end-user.
SUSHI is distributed through liquidity mining. If you don’t know what this means, read our yield farming article first to get familiar with the basics.
SUSHI is distributed to those who provide liquidity to specific Uniswap pools. Then, they can deposit their Uniswap LP tokens into the SushiSwap staking contracts to start earning SUSHI.
Initially, these Uniswap pools were:
To incentivize the provision of liquidity for the SUSHI market, the SUSHI-ETH pool pays out double rewards. Shortly after launch, SUSHI voters voted on adding additional pools to be eligible for the distribution. This is the power of community governance!
The SUSHI reward distribution started at Ethereum block 10,750,000. The rewards are reduced after 100,000 blocks (or roughly two weeks). After these first two weeks of initial distribution, the liquidity tokens in the staking contract will be migrated to the SushiSwap contracts. This means that all Uniswap LP tokens staked on SushiSwap will be redeemed on Uniswap for the tokens they represent, and new liquidity pools will be created with them on SushiSwap. This will effectively mark the launch of the SushiSwap exchange.
So you’ve decided that you want to stake Uniswap tokens in return for SUSHI. The first step is to acquire those tokens. We’re going to provide liquidity for UMA-ETH, but feel free to follow along with any pair of your choosing (provided, of course, that the LP tokens are usable on SushiSwap).
Note: Due to the potential of impermanent loss, you may receive a different distribution of tokens upon redemption than you initially added.
Now that you have your ETH-UMA UNI-V2 LP tokens, let’s visit the restaurant at sushiswap.org.
The man, the myth, the legend: Chef Nomi, the sushi chef.
Like most Web3 applications, we need to connect an Ethereum wallet to the site to interact with it. There are two options for this: MetaMask, or WalletConnect. Select Unlock Wallet in the top-right corner, and pick your preferred wallet.
Unlocking the wallet shows you your SUSHI balance and the total supply.
Time to consult the menu! Hit the Menu button at the top of the window to see what’s available.
If you scroll down, you’ll see all the options available to you.
For each of these items, you’ll stake a different token. The Umami Squid is looking tasty to us, so we’re going to go with that.
If you’ve read our ERC-20 guide, you know that you sometimes need to grant withdraw permissions to a contract. By selecting the approve function, we’re telling the network that SushiSwap is allowed to take UMA-ETH UNI-V2 LP on our behalf.
After that, you’ll be able to select the amount you want to stake.
And now, you should be good to go! The chef will get to work making your sushi. At any point, you can harvest your SUSHI, remove your LP tokens, and take them back to Uniswap to retrieve your ETH and UMA.
As of September 1st 2020, SushiSwap is an unaudited project. Depositing funds into a smart contract always carries the risk of bugs, even for audited and highly reputable projects. However, SushiSwap was created by anonymous developers which makes depositing funds into them even riskier.
SushiSwap is a fun experiment, but never deposit more than you could lose. In addition, due to the extremely high gas costs on Ethereum, smaller deposits can have quite a lot of farming to do before they can actually turn a profit.
With that said, the SushiSwap developers have invited a number of auditing firms to audit their contracts. Audits are expensive, but we’ve already seen with other community-owned projects such as YAM that users are willing to fund audits for initiatives they believe in.
SushiSwap is an exciting experiment that challenges the competitive advantage of an already successful DeFi protocol – Uniswap. SushiSwap is a fork of Uniswap with the key difference being community governance.
The real test of SushiSwap will start after the initial two-week distribution period finishes. Is SushiSwap going to siphon significant liquidity from Uniswap? Or are SUSHI farmers only looking for a quick profit?
No matter how successful SushiSwap becomes in the end, it shows that no product or service has an indisputable advantage in DeFi.