What is SushiSwap?

What is SushiSwap?

To recap briefly, Uniswap is a decentralized exchange protocol that works without an order book (“tumbler”). Instead of an exchange “tumbler” Uniswap uses a model called “automatic market maker” (AMM), where liquidity providers fill liquidity pools with their own funds.

SushiSwap is a fork of Uniswap with several key differences, the main one being its own SUSHI token. This token has two functions: it gives holders the right to vote on the further development of the project, as well as the income from the commissions collected by the protocol from the exchange of tokens. Simply put, SUSHI holders “own” the protocol, in proportion to their share of the total number of sushi tokens issued.

The SushiSwap protocol launched very loudly and successfully – in the first 12 hours, the pools received the equivalent of $270 million. What’s the reason for such staggering popularity from launch? The fact is that distributed management of the organization by the community itself is very intertwined with the idea of DeFi. The rise of profitable farming as a fairer way to distribute tokens to holders (than mining or stealing) has given the decentralized finance ecosystem a boost in popularity. To avoid repeating the sad stories of failures and fraud in ICOs, such protocols come out without pre-mining, no special rights or rewards for the founding team, all participants are equal among themselves, plus there is a clear source of income (exchange commissions) that is shared fairly among all participants.

The UniSwap team announced on August 7, 2020 that they had closed an $11 million funding round from prominent venture capital fund Andreessen Horowitz. This was unpleasant news for a large part of the community – after all, venture capital is always given for the sake of building capitalization and attracting additional funding, which over time leaves the founding team with a smaller and smaller share. Some crypto-enthusiasts believe that Uniswap has “sold out,” and sooner or later the protocol will turn from its current path to making more profit for the project team. SushiSwap, despite all its “meme” nature, offered to solve this problem and let SUSHI holders manage the project.

How does this management work in practice? Anyone can submit an improvement proposal – called a SushiSwap Improvement Proposal (SIP) – that will be voted on by SUSHI token holders. These can be minor or major changes to the protocol. Instead of a more traditional development team with its own strategy, SushiSwap offers full control by the community of holders. A strong community remains a key success factor for any token, and even more so for the DeFi-protocol.

How are new SUSHI tokens distributed?

SUSHI tokens are distributed through liquidity mining – lending your funds to a liquidity pool. SUSHI are distributed to those users who have provided liquidity to certain Uniswap pools. They can take their Uniswap LP tokens and send them to SUSHI stacking contracts, where they will start to accrue.

Initially, such pools in Uniswap were:

  • USDT-ETH
  • USDC-ETH
  • DAI-ETH
  • sUSD-ETH
  • COMP-ETH
  • LEND-ETH
  • SNX-ETH
  • UMA-ETH
  • LINK-ETH
  • BAND-ETH
  • AMPL-ETH
  • YFI-ETH
  • SUSHI-ETH

To incentivize the provision of liquidity to the SUSHI token, the SUSHI-ETH pool pays a double award. Almost immediately after launch, token holders voted to add additional pools. This is an example of community stewardship of the organization.

Reward distribution was started on block number 10,750,000 of the Ethereum blockchain. Rewards are scheduled to decrease after 100,000 blocks (about 14 days). After these two weeks, the liquidity tokens on the staking contracts will be transferred to SushiSwap contracts. This means that Uniswap LP token holders will have to withdraw their liquidity from Uniswap contracts and transfer it to SushiSwap pools. This will mean the actual launch of the SushiSwap exchange.

How will the liquidity pools work in SushiSwap?

The plans of the founders of SushiSwap may seem naive or ingenious, depending on the reader’s point of view. For now, they are as follows:

  • Give away all SUSHI tokens to revenue farmers, traders and active Ethereum users in the above way for 100,000 blocks.
  • Liquidate Uniswap LP tokens 2 weeks after launch and transfer users to SushiSwap pools
  • SushiSwap exchange transaction fee will be 0.25% to liquidity providers + 0.05% to SUSHI token holders.

Conclusion

SushiSwap is a fork of Uniswap with its own governance token. The crypto community is more optimistic about a fully distributed project than a project that attracted third-party funding from a private entity.

 

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