Every day brings something new to the cryptocurrency market as the DeFi craze continues to boom and surprise.
Announced on August 26th, the SushiSwap project is attempting to take the concept behind the leading decentralized exchange protocol, Uniswap, and offer an alternative with further incentives to liquidity providers.
Enters SushiSwap: What is it?
In an announcement from August 26th, a team of developers revealed the SushiSwap project – an initiative attempted to be “an evolution of Uniswap with SUSHI tokenomics.”
The team has taken one of the core concepts behind Uniswap – incentivized liquidity provision, and added further stimuli for those who decide to stake their tokens into the protocol. With Uniswap, liquidity providers receive a share of the trading fees of the corresponding pool for as long as they provide liquidity in it.
With SushiSwap, users can also provide liquidity and receive fee rewards, but they can also simply hold the native token called SUSHI and continue receiving part of the fees. The mechanism is similar to that of Uniswap.
- 0.25% of the fees go to the liquidity providers.
- 0.05% of the fees get converted back to SUSHI and distributed to SUSHI holders.
With Uniswap, liquidity providers receive 0.3% of the fees generated in the respective pool.
Initial Liquidity Provision Phase
According to the official announcement, the team is aware that a lot of people are existing liquidity providers in Uniswap pools. Hence, they’ve made it possible to start providing liquidity and earning SUSHI tokens by staking Uniswap LP tokens into an initial list of pools.
The initially available pools are for CeFi stablecoins, DeFi stablecoins, lending protocols (COMP, and LEND), Synthetic assets (SNX and UMA), Oracles (LINK and BAND), Ponzinomics (AMPL and YFI), and a delicacy pool receiving x2 rewards – SUSHI-ETH.
For this initial phase, the protocol will be minting new tokens each time a block is mined on Ethereum’s network. It started doing so at block 10750000. The idea is to create 100 new SUSHI tokens at each block, but for the first 100000 blocks, the amount of SUSHI created will be multiplied by 10, hence minting 1000 SUSHI tokens per block.
This is to incentivize early farmers and adopters of the protocol and to help in the Liquidity Migration.
Indeed, it appears that the incentive is working as there is over $350 million already locked in the protocol.
Liquidity Migration Phase
Once the 100000 ETH blocks are mined, which should take place in about two weeks, the liquidity tokens will be migrated onto SushiSwap contracts.
This process will involve taking all of the Uniswap LP tokens that are staked on SushiSwap at the time, redeem them from the respective token pairs and initialize new pools with those tokens.
The stakers don’t need to do anything and will continue to receive SUSHI token rewards from providing liquidity going forward.
Now, with all of the above being said, it’s essential to understand that the project’s code hasn’t been audited, leaving those involved open to unknown smart contract risks, if any.
The team has invited various auditing companies and has promised to pay 5 ETH to the one who goes through with the process.
A couple of weeks ago, another project received similar, if not more, hype – YAM. However, soon after it was released, the team found a critical error in the code, which quickly rendered the entire protocol ungovernable.
SUSHI’s Token Price Falls off a Cliff
According to data on CoinGecko, SUSHI’s price fell from about $170, when the token was first released, to $1.15 where it’s currently trading – a 99% drop.
It’s worth pointing out that 10% of every SUSHI distribution is set aside for future iterations and development of the protocol, which could be creating additional selling pressure.
Moreover, for liquidity providers to be incentivized to hold the SUSHI token, the trading fees generated from the pools need to be substantial as otherwise, LPs will simply sell their rewards for profits.
Moreover, the impermanent loss risk in the SUSHI-ETH pool is very considerable, given the steep decline.
In any case, even though it might be a project that the community is currently excited about, it remains particularly important to do your own research and carefully examine the product before investing anything in it. And as always, never spend money that you can’t afford to lose.