Throughout the past year, the world of crypto has witnessed the decentralized finance (DeFi) market grow and evolve to unprecedented levels. Blockchain technology and cryptocurrencies are taking the financial world by storm. There has been a slew of innovative products developed to provide investors with creative ways to yield returns on their investments, such as yield farming.
SushiSwap, a relatively new decentralized exchange (Decentralise Exchange (DEX) is a crypto exchange platform that is built upon blockchain technology and negates the need ...), is currently setting an example for Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build... technology. The DEX is an AMM (automated market maker) and DeFi token with a continuously growing user base. Uniswap, one of the best-known Ethereum dApps, was the inspiration for the DEX. SushiSwap extends the platform’s group governance structures and DeFi functionality.
So, what’s all the fuss about? You’ve come to the right place if you want to learn more about SushiSwap (SUSHI). This guide will teach you everything you need to know about the project, from where it all began to the risks and benefits of SushiSwap.
What Is SushiSwap?
SushiSwap is a decentralized exchange (DEX) and automated market maker (AMM) with its own smart contracts. It was developed by “Chef Nomi” in 2020 and runs on the Ethereum blockchain. Decentralized exchanges have been a stable environment for peer-to-peer cryptocurrency transfers, without neither the requirements nor interference of any middlemen or third parties. Providing its own AMM ensures that assets are priced using a trading algorithm, rather than an order book in the way conventional exchanges operate.
SushiSwap is a fork of Uniswap, with several significant variations and additional features, the most notable of which is the SUSHI token. Essentially, the token serves two purposes. First, it grants holders governance privileges and entitlements unique to SushiSwap. And second, it represents a share of the protocol’s payments. SUSHI holders, to put it another way, “control” the overall protocol.
For those unaware of what Uniswap is, it is a decentralized distribution protocol that operates without the use of an order book. It uses an AMM model instead of an order book, in which liquidity suppliers add funds to liquidity pools. AMMs provide instant quotes to traders through an algorithm, as opposed to an order book, in which a trader has to refer to for a price.
The DeFi concept is inextricably related to community governance. A slew of new tokens has been released, due to liquidity mining (yield farming) as a feasible form of token delivery. The goal is to give an equal opportunity by, for instance, providing a fair distribution, depending on the sum of funds supplied.
Governance privileges are one of the primary features of SushiSwap. These privileges are awarded to token holders as a result of the token issued by these liquidity rewards. On top of this, SUSHI holders are also entitled to a percentage of the fees charged through the protocol by traders as a form of entitlement. In the case of SUSHI, anyone may apply a SushiSwap Improvement Proposal (SIP), which is then voted on by SUSHI token holders.
As a result of this method of governance, the SushiSwap protocol can undergo minor or significant changes. SushiSwap’s creation is entirely in the hands of SUSHI token holders, rather than a more conventional team like Uniswap. DeFi protocols will benefit from a strong community. This is the idea behind SushiSwap.
The History of SushiSwap
In order to develop the base for SushiSwap, the founding team copied the open-source code used by Uniswap. Then SushiSwap implemented a tactic in which they offered users SUSHI token prizes if they put money in a special Uniswap pool.
SushiSwap Price Overview, Source: CoinMarketCap
Despite being young and growing in popularity, SushiSwap has had a troubled background. The project went live in August 2020, and developers decided not to perform a premine. Instead, the DEX SushiSwap was founded by a pseudonymous person or collective named Chef Nomi.
Sam Bankman-Fried, CEO of FTX derivatives exchange and quantitative trading company Alameda Research, took de jure charge of SushiSwap on September 6th, 2020, and migrated tokens from Uniswap to SushiSwap on September 9.
How Does SushiSwap Work?
The idea (and main purpose) behind SushiSwap is to simulate a standard market by allowing users to buy and sell various crypto assets. Tokens traded on SushiSwap are maintained by smart contracts, rather than by a single central authority. Users can also lock crypto on the software, which can then be accessed by traders. Those who sell against locked securities must pay a premium. This premium is then proportionally allocated to all liquidity suppliers, depending on the funds invested.
By first adding their Ethereum wallet to the SushiSwap farming program and then successfully combining two assets into a smart contract, liquidity providers can add to SushiSwap pools. For example, SushiSwap’s USDT/ETH liquidity pool is made up of reserves of equivalent size in USDT and ETH. Following that, buyers will exchange tokens inside the pool according to the protocol’s rules.
SushiSwap smart contracts require a buyer to give and receive the same amount of tokens in order to maintain an overall stable price pool. Suppliers are compensated with protocol payments, as well as SUSHI tokens in return for preserving liquidity in these pools.
Providers will redeem their funds as well as their “harvest,” which is the cryptocurrency gained through farming, at any time. Users can access the SushiBar software if they choose to gain more cryptocurrencies after harvesting their SUSHI. The software helps them to stake their SUSHI to earn the xSUSHI coin, which is made up of SUSHI tokens purchased on the open market and a portion of the exchange’s generated fees.
How to Use SushiSwap
In order to use SushiSwap, you’ll need to first get your hands on some ETH. There are many options, but the most common is to use a fiat on-ramp. You first have to find a centralized exchange that accepts fiat currency and also fits your personal needs. Fiat on-ramps call for verification through proof-of-identity (POI) or proof-of-address (POA).
Next, you’ll turn the fiat currency to ETH after you’ve enrolled. Now you can get to SushiSwap. The first thing you can do when you get to SushiSwap is pick a liquidity pool. Keep in mind that AMMs like SushiSwap don’t need projects to go through any kind of verification. It’s important to always do your own research, in order to avoid rug pulls and other dubious schemes when investing.
The next step is to attach your ERC-20-compliant wallet once you’re ready. Link it to your chosen exchange platform and then deposit your crypto investments into the liquidity pool that best fits your investing plan. You can get SLP tokens after you stake your tokens. If the project’s liquidity pool grows, the value of SLP tokens rises. You can also farm these tokens to win more rewards.
SushiSwap vs. Uniswap
In a nutshell, SushiSwap is a feature-rich clone of Uniswap. It’s taken the framework of Uniswap and added a whole ton of stuff that makes it an upgraded version on Uniswap. It began with Sushi Chef, which was a smart contract that allows Uniswap liquidity providers to store their pool tokens in exchange for SUSHI tokens. So, essentially, Uniswap liquidity providers sent their pool tokens to Sushi Chef, and Sushi Chef rewarded them with tokens.
Both liquidity providers who kept their Uniswap pool tokens with the Sushi Chef allowed Sushi Chef to remove their tokens from Uniswap pools and transfer it to SushiSwap pools on September 9, 2020. The Vampire Attack resulted in the move of nearly $1 billion of liquidity from Uniswap to SushiSwap.
Then we have SUSHI tokens. Uniswap was levying a 0.3 % tax for any exchange that was then added to the pool. SushiSwap contributes just 0.25 % of the charge to the pool, with the remaining 0.05 % split among all SUSHI holders. There are roughly three distinct classes of people to which SushiSwap most pertains traders who exchange, liquidity investors that gain 0.25 % of trading commissions, and sushi holders who earn 0.05 % of the trade fees.
When SushiSwap successfully carried out a “Vampire Attack” on the Uniswap DEX, it literally sucked out Uniswap’s liquidity. Both platforms use a very basic algorithm to automatically balance exchange pairs. They also both use the #DeFi hashtag and operate in the Ethereum ecosystem.
SushiSwap Benefits and Risks
As we mentioned, SushiSwap is essentially an upgrade from Uniswap. Let’s take a look at some of the features and benefits associated with SushiSwap.
An entire reward system for all users
Uniswap pays liquidity providers, or investors, 0.3 % of all trading fees, while SushiSwap pays 0.25 % to all participating providers, with the remaining 0.05% converted into SUSHI and allocated to token holders through SushiSwap. Individuals who hold SUSHI tokens can also benefit from farming.
Continued earnings in protocol fees
SushiSwap had an amazing DeFi boom very early on, quickly becoming one of the most successful DeFi investments. SushiSwap helps users keep collecting the protocol’s charge, which is denominated in SUSHI. And if a liquidity provider wishes to leave the service, he/she can still profit from the SushiSwap protocol’s rewards through SushiBar.
The Uniswap scheme, like most DeFi protocols today, rewards its providers with trading commissions as they stake their tokens. If they’re deliberately providing liquidity to the pool, this automatically happens. However, if they withdraw their percentage, they are no longer eligible for benefits. Meanwhile, liquidity providers in SushiSwap own a percentage of the pool, and have the option to retrieve SUSHI tokens in order to sell them.
SushiSwap allows consumers to win incentives for becoming active liquidity suppliers, as well as token holders. However, despite SushiSwap’s advantages, there are certain setbacks and risks associated with the project. First and foremost, SushiSwap has experienced, and been criticized for, a lack of audit. Furthermore, the project’s anonymous creators don’t have protections for the majority of users. The bulk of DeFi ventures, including those stable and audited, have been hacked with flash loan hacks and other forms of threats.
Additionally, there have been some issues found recently with regard to SushiSwap’s security. For instance, there have been errors that failed to avoid the same liquidity provider token from being inserted more than once, causing payout variables to be disrupted. A flaw that could enable funds to be stolen from the network if the owner’s private key is compromised has also been an issue.
In addition to these events, there was a massive loss of trust in the platform when Chef Nomi withdrew his entire SUSHI stake from a development fund and sold it for nearly 18,000 ETH, valued at over $13 million, on September 5, 2020. This is when Bankman-Fried was sworn in. Despite Chef Nomi’s attempts to defend his conduct as beneficial to the project, several users suspected him of pulling an escape scam, prompting him to leave the project due to the community’s lack of trust. However, Chef Nomi then returned the approximately $14 million to the fund, apologizing to SushiSwap users.
The Bottom Line
To recap, SushiSwap helps users to share cryptocurrency assets rapidly and efficiently while collecting payments by adding crypto to a liquidity pool. It builds on its predecessor by adding the SushiSwap token, which allows users to collect SUSHI even after withdrawing their crypto from the pools, and has a say in how SushiSwap is managed. SushiSwap had shortcomings from the start, such as uncapped inflation and a lack of security for its development funds. SushiSwap became more decentralized as a result of Chef Nomi’s decisions, and SushiSwap users voted to limit overall SUSHI availability, making SushiSwap even safer for investors.
It’s fair to say that SushiSwap has made a splash in the DeFi sphere, rapidly outpacing many other well-known DeFi ventures in terms of overall value locked. Indeed, SushiSwap’s meteoric rise may be far from over with new features such as lending and cap orders on the horizon.