The SushiSwap ($SUSHI) decentralised exchange (DEX) got off to a successful start in 2020 as it managed to lure customers and over $1 billion worth of assets from main rival Uniswap. However, the exchange has struggled to keep up the momentum in recent years and is now lagging far behind rivals with just a 0.13% market share in the DEX industry. Yet, SushiSwap still manages to stand out through its unique menu of crypto offerings, from yield farming to staking, and lending to borrowing.
SushiSwap operates using an automated market maker (AMM) model, which removes the need for traditional order books and intermediaries. Instead, it utilises liquidity pools, pots of tokens deposited by users that facilitate trades using smart contracts. This approach allows for peer-to-peer trading without the need for a middleman. Since its inception, SushiSwap has evolved from a simple trading platform to a comprehensive decentralised finance (DeFi) ecosystem. Today, SushiSwap offers a variety of services beyond simple exchanges, including yield farming, staking, and even lending and borrowing functionalities, all housed within the same user-friendly application.
A controversial history
Originally, SushiSwap was developed as a fork of Uniswap ($UNI), the leading DEX built on the Ethereum blockchain. Launched in September 2020, SushiSwap introduced several enhancements over its predecessor, including staking rewards, improved liquidity, and lower fees. However, it was the DEX’s own native token, SUSHI, that managed to lure investors onto the platform. This move aimed to incentivize participation by providing token rewards to liquidity providers and token holders.
Despite its ambitious start, SushiSwap experienced a tumultuous few years after its anonymous creator sold all their SUSHI tokens for $13 million in $ETH and relinquished control to Sam Bankman-Fried, the then-CEO of FTX and later known for his own controversies. SBF took a temporary leadership role in SushiSwap, which was highly controversial for a decentralised platform. However, the former FTX CEO managed the migration of nearly $1 billion in funds from Uniswap to SushiSwap and eventually handed back control to the community. Under the guidance of co-founder 0xMaki, SushiSwap emerged as a leading DEX in early 2021, advocating for a decentralised and community-led approach, contrasting with Uniswap’s venture capital-backed model.
In October 2022, the Sushi governance DAO elected Jared Grey, who is still the “head chef” at the time of writing. Grey’s election was significantly supported by SUSHI whales, indicating a strong preference within the community. His leadership aimed to revitalise SushiSwap, which had seen a decrease in activity compared to its early days. While the exchange was once encroaching on Uniswap’s volumes, when Grey took over it was only doing 2% of the activity on its main rival.
How does SushiSwap work?
Liquidity providers, or users looking to contribute to the platform’s liquidity, start by connecting their Ethereum wallet to SushiSwap’s farming protocol. They then deposit pairs of assets into a smart contract, such as the USDT/ETH liquidity pool, which requires equal values of USDT and ETH. These contributions are critical for ensuring that there’s always enough liquidity to execute trades seamlessly. In return for their contributions, liquidity providers are compensated with protocol fees and a share of SUSHI tokens. This setup not only rewards users for their liquidity but also incentivises continued participation in the ecosystem.
When liquidity providers decide to withdraw their deposits, they can also take with them the rewards they’ve earned, referred to as their “harvest”. For those looking to further leverage their SUSHI tokens, SushiSwap introduces the SushiBar. This feature allows users to stake their SUSHI in exchange for xSUSHI tokens, which represent a stake in the fees generated across the exchange. The xSUSHI token offers an additional layer of earning potential by providing holders a claim on a portion of the platform’s transaction fees, collected from the diverse range of activities facilitated by SushiSwap.
SushiSwap’s market ranking
While SushiSwap once fought for the status of top DEX, it is currently lacking in the market rankings as of 6 February. According to CoinMarketCap, its Ethereum-based exchange was only ranked 53 out of all DEX’s with a daily trading volume of just $5 million. Meanwhile, Uniswap was facilitating more than 100 times that with its daily trading volume of $563m. Looking at its decentralised finance (DeFi) capabilities, SushiSwap was ranked 6 out of all DEXs with its total value locked (TVL) of $313m.
The SUSHI token
$SUSHI is the Ethereum token that powers SushiSwap. Holders of the cryptocurrency can participate in community governance and stake their tokens to receive a portion of SushiSwap’s transaction fees. With governance utility, holders of $SUSHI tokens aren’t just investors, they’re active participants in the platform’s future, wielding the power to vote on key proposals and decisions that shape the direction of SushiSwap. This democratic approach to governance fosters a sense of community and ownership among users. This utility initially set SushiSwap apart from its rivals.
Beyond governance, $SUSHI acts as a reward for users of the platform. By providing liquidity to the platform’s pools, users earn $SUSHI tokens for their contribution. This process, known as yield farming, is a cornerstone of the DeFi movement, allowing participants to earn passive income while supporting the ecosystem’s liquidity.
SushiSwap advantages
SushiSwap’s main advantages come in its yield farming opportunities. Users can provide liquidity to various pools and, in return, earn SUSHI tokens as a reward. This not only incentivises participation but also helps stabilise the pools, ensuring there’s always enough liquidity to facilitate trades. Moreover, SushiSwap’s continued innovation keeps it at the cutting edge of the DeFi space. With features like BentoBox, a token vault that enables users to earn interest on their deposits, and Kashi, a platform for margin trading and lending, SushiSwap has positioned itself as a comprehensive ecosystem that caters to a wide range of financial activities. This commitment to innovation not only attracts a diverse user base but also ensures that SushiSwap stays relevant in the fast-evolving world of cryptocurrency.
SushiSwap disadvantages
However, no platform is without its challenges. One of the main drawbacks of SushiSwap is the steep learning curve associated with its use. For newcomers to the DeFi space, navigating SushiSwap’s plethora of features can be at times confusing. Without a solid understanding of how decentralised exchanges and liquidity pools work, users may find themselves feeling lost at sea. This complexity can deter potential users, especially those who are new to cryptocurrency, from dipping their toes into the SushiSwap waters.
Another issue facing SushiSwap is the inherent risk of impermanent loss, a common concern for DEX users. When the price of tokens in a liquidity pool changes compared to when they were deposited, liquidity providers can end up with less value than they initially put in. This risk, combined with the volatile nature of cryptocurrencies, can make providing liquidity on SushiSwap a risky endeavour.
Lastly, competition in the DeFi space is fierce, with numerous platforms vying for users’ attention and assets. Despite its innovative features, SushiSwap faces stiff competition from other DEXs like Uniswap and PancakeSwap ($CAKE), which also offer enticing rewards and functionalities.
