All You Need to Know About DeFi’s SushiSwap Saga (But Were Afraid to Ask)

The SushiSwap saga and its native token, SUSHI, will go down in crypto history. 

What began as a tokenized version of Uniswap has spiraled into something much more. It reminds crypto users of the power of open-source protocols, 24/7 economic incentives, as well as the sheer power of online communities. Even now, after most of the dust has settled, the lessons from this fascinating experiment continue to unveil themselves.

As a protocol, SushiSwap is a decentralized exchange (DEX) like many others. It’s ambitions, however, are entirely unique. 

This week’s Project Spotlight feature will unpack the twists, turns, and lessons learned. Ultimately, readers will gain a new appreciation for the power of decentralized, Internet-based money. 

None of the events that follow would have been wholly possible in traditional markets. 

Unpacking Uniswap

One must first begin with understanding how Uniswap functions as a DEX, as well as what led to the overflow of so-called “food tokens.”

Uniswap has been a mainstay within the DeFi community. It offers traders unique token pairs, is non-custodial, and, before SushiSwap arrived, billions of dollars in liquidity. The way the platform works is simple: Traders trade, and liquidity providers (LPs), well, provide liquidity.

Source: DeFi Pulse

In providing liquidity, LPs can also earn fees. Each time a user arrives and interacts with an LP’s pool, either through buying or selling an asset, the LP makes 0.3% of that trade. They also receive tokens that behave like receipts of their activity on Uniswap. 

These are called LP tokens, and they represent the amount of liquidity the LP has provided.

Based on the above, there are opportunities to earn between 3% to 5% by adding idle ERC-20 tokens to various Uniswap pools. Source: Zapper.fi 

These points may seem insignificant, but in the context of this article, they’re critical to remember. 

For a deeper dive into how Uniswap defines asset prices as well as a broad comparison with other DEXes, readers are advised to read Crypto Briefing’s previous coverage on the subject here. 

Essentially, Uniswap has unbundled the work of centralized exchanges and handed it over to users by offering them money. This is in the way of trading fees, liquidity provision, token listings, market making, and arbitrage opportunities. 

For the sake of this article, though, one must only keep in mind that Uniswap is an open-source protocol, it offers users LP tokens for contributing liquidity, and, perhaps most importantly, it is backed by large venture capitalists. 

Who’s Hungry for Tokens?

In August, Uniswap raised $11 million from notable investors, including Andreessen Horowitz, USV, Paradigm, and others. The investment was made via the purchase of shares in Universal Navigation, the company behind Uniswap. 

These shares are thought to eventually earn money for investors once Uniswap activates a protocol fee of 0.05%. Currently, this fee is not active, but it is a serious consideration. And though it has not been a point of serious controversy, the return to VC capital and centralized shareholders is not a core tenet of the crypto community’s original ethos. 

At roughly the same time that this investment was made, the crypto space was in the heat of the yield farming, sometimes called liquidity mining, trend. 

Ignited by Compound Finance in June, token holders could lend and borrow their tokens to a protocol and earn a healthy return, plus a governance token in proportion to the amount a user lent or borrowed.

In Compound’s case, they began offering users its COMP token for supplying liquidity. 

The newly-launched mechanism worked like a charm. Not only did holders rush to the platform to earn free COMP tokens, but the price of COMP also skyrocketed, making some holders millions of dollars. Emerging protocols throughout the DeFi space adopted the mechanism nearly immediately. 

Some protocols, like yEarn Finance, aligned the incentives well, but the majority became quick “farm-and-dump” schemes reminiscent of the airdrops and initial coin offerings of yesteryear. Perhaps the lowest effort manifestation of yield farming came via the rise of food coins and various forks.