Decentralized Finance (DeFi) has seen explosive growth over the past year, and Decentralized Exchanges (DEX) has arisen to challenge Centralized crypto exchanges like Coinbase and Binance.
The DeFi sector has exploded in the past 12 months with its valuation rising from $1billion to $60 billion within this period.
As opposed to centralized cryptocurrency exchanges, decentralized exchanges enable direct peer-to-peer transactions and eliminate the need for third parties. With DeFi’s quick development and the expanding popularity of decentralized trades, new clients and players keep on entering the field of DeFI and DEXs. Examples of decentralized exchanges today are Uniswap and SushiSwap.
Uniswap has consistently been one of the best DeFi protocols for trading tokens on Ethereum. It was created by a small group of passionate developers who made the code open source and made it available to everyone.
SushiSwap is a fork of Uniswap that adds the desired SUSHI token. Furthermore, it gives the users control of the protocol and pays them part of the fee. In this article, we will examine what SushiSwap is, how it works, and what the purpose of SUSHI tokens is.
What is SushiSwap?
SushiSwap is a decentralized trade (DEX) that is equipped with an automated market maker (AMM) smart contract.
The DEX is built on the Ethereum blockchain and allows users to trade countless tokens and offer other monetary types of assistance. It has no focal power or delegate. Instead, it depends on smart contracts and liquidity given by different users to complete transactions. SushiSwap is like Uniswap, which additionally runs on Ethereum, and PancakeSwap dependent on Binance Smart Chain.
It is a community-run DeFi project that aims to better tailor the incentives of network participants through revenue sharing and community-driven network effects.
How Did SushiSwap Start?
SushiSwap started as a fork of Uniswap. Uniswap is another AMM DEX that became the most well-known DeFi project in 2020. The code is open source, and the developers at SushiSwap saw that they could add a few upgrades.
To start the project, SushiSwap siphoned out clients and liquidity from Uniswap by giving enhanced incentives to liquidity providers (LP) – a controversial process known as the “vampire attack”. However, this was a successful strategy and some Uniswap pools moved over 90% of the liquidity to SushiSwap.
How Does SushiSwap Work?
Like Uniswap, SushiSwap depends on an automated market maker (AMM) framework that uses smart contracts to complete transactions. Liquidity providers provide tokens through liquidity pools. These tokens are locked in the pools as token pairs, thus providing the assets needed to finish the trade. Liquidity providers are rewarded with a portion of the transaction fees in a process known as yield farming.
In addition to the token exchange, SushiSwap also offers other DeFi functions such as the capacity to stake SUSHI tokens in the network and get rewards. Furthermore, users can also participate in loan services via its MISO service and purchase newly provided tokens for DeFi startups.
Liquidity providers add to the SushiSwap pool by connecting their Ethereum wallet to the SushiSwap farming software and locking the two assets in a smart contract.
Buyers can exchange tokens in the pool according to the rules of the agreement. The smart contract that SushiSwap runs on receives the number of tokens from the buyer and returns the same amount of tokens, keeping the total price of the pool unchanged.
In return for maintaining liquidity in these pools, providers are rewarded with protocol fees along with a portion of the 100 SUSHI minted every day.
Suppliers can withdraw their money and their “harvest”, i.e. the cryptocurrency obtained from farming, at any time.
Users who want to earn more cryptocurrency after harvesting SUSHI can use Sushi Bar. The application allows users to pawn their SUSHI to earn xSUSHI tokens, which consist of SUSHI tokens bought on the open market with a portion of all the fees generated on the exchange.
Who Manages SushiSwap?
The team behind SushiSwap was anonymous and the protocol is operated by a pseudonym called “Chef Nomi”. As observed by industry experts at the time, this was the beginning of the problem as the managed wallet, which contained a large number of funds, was under the control of the anonymous founder.
On September 6, Chef Nomi sold $8 million worth of SUSHI tokens, which caused the token price to drop. Many people in the industry thought this was an exit strategy, but Chef Nomi at the time insisted on his innocence, saying that he had no intention of deceiving anyone and that the funds were being legally amassed through the 10% Devshare allotment. This did not help the SUSHI holders who at that point had a 50% loss.
By September 7, boss Nomi had transferred control of the project to Sam Bankman-Fried (SBF), CEO of FTX Derivatives Exchange. Under the new management, a multi-signature wallet is used in the SushiSwap Smart Contract and transfers control to the community. What ended up happening was that several SUSHI whales gained control of the protocol through governance vote heavily weighted towards the biggest bag holders.
What Is Sushi the Token?
The SUSHI is an ERC-20 token. The tokens have multiple uses in the ecosystem. The SUSHI token is used to reward users with part of the transaction fees. SUSHI also gives users the right to rule. The more SUSHI you have, the more voting rights you have. It’s worth noting that SUSHI’s circulation is set at 100 tokens per block.
SUSHI tokens are used as a reward for liquidity mining. Tokens allow their holders to participate in the administration of the platform and have the right to receive part of the fees paid by the traders to the agreement. SUSHI holders can submit SushiSwap Improvement Proposals (SIP), and token holders to vote with their tokens to manage the platform.
SushiSwap offers users a quick and easy way to exchange cryptocurrency assets and earn fees by adding cryptocurrencies to the liquidity pool. It improves on its predecessor by introducing the SushiSwap token, which allows users to continue to earn SUSHI after withdrawing cryptocurrency from the pool and have a say in how SushiSwap works.
SushiSwap must have flaws such as unlimited inflation and lack of protection for development funds, which allows Chef Nomi to get most of it off. However, Chef Nomi’s actions resulted in SushiSwap becoming more decentralized and SushiSwap users voted to limit the overall supply of SUSHI, making SushiSwap safer for investors.
SushiSwap has undoubtedly made waves in the DeFi space, quickly outperforming other more mature DeFi projects in terms of overall value. However, with the advent of new products such as loans and limit orders, the rapid rise of SushiSwap may not be over for a long time.