Everyone loves a good mystery, and the crypto world has its fair share. The biggest one yet, perhaps, is the identity of the person who set the ball rolling by introducing the first cryptocurrency. Satoshi’s identity still remains unknown, a little over a decade later and it’s no surprise that other crypto creators choose to remain anonymous as well.
Chef Nomi, the brain behind Sushiswap, is one such creator. He(or they) remains anonymous, despite having created one of the fastest-growing DeFi projects running on the Ethereum blockchain.
Well, if you have never heard about SushiSwap and its interesting history, this article is just what you need. Keep reading for an in-depth look at the SushiSwap protocol, how it works, and how you can get started on the platform.
Let’s dive right into it, shall we?
- 1 What is SushiSwap?
- 2 A Fishy Beginning
- 3 How Does SushiSwap Work?
- 4 So, What Makes SushiSwap So Popular?
- 5 How to Use the SushiSwap Platform
- 6 How to Stake in SushiSwap Liquidity Pools?
- 7 Recipe for Success: A Review of SushiSwap’s Updates in 2020
- 8 SushiSwap Competitors: Can UniSwap and Balancer Upset SushiSwap’s Growth?
- 9 SushiSwap Forecast
- 10 Conclusion
What is SushiSwap?
For you to understand how SushiSwap works, we must first take a look at Uniswap, another top-performing DeFi project.
Uniswap is a decentralized exchange that runs on the Ethereum blockchain. Instead of using an order book, Uniswap utilized an automated market-making (AMM) model that allows users to trade without intermediaries. The protocol’s users can exchange tokens and lend their cryptos to liquidity pools and earn fees from it.
Uniswap is an open-source protocol, which is how SushiSwap came to be. Although Uniswap is decentralized, users don’t have much say in the protocol’s development. Chef Nomi created SushiSwap to solve this issue by creating a fork of Uniswap.
SushiSwap is a blockchain application that also functions as a liquidity pool platform. However, unlike Uniswap, SushiSwap distributes the Sushi cryptocurrency, which is the protocol’s native token.
Although the protocol was only launched in September 2020, it is already circulating 127,244,443 Sushi coins. It limited maximum supply to support rising coin value as demand for tokens grew. SushiSwap’s market cap went past $2.155 billion by the 1st of March 2021.
SushiSwap is an interest-based lending platform that decentralizes services, allowing investors to share capital gains in a peer-to-peer manner. Users lock in their assets into SushiSwap and provide liquidity to traders. The traders pay transaction fees and increase the value of locked funds, positively growing the size of the pool.
The software runs on Ethereum’s blockchain and allows users to trade different crypto assets without facing liquidity issues.
Blockchain users are overwhelmed with DeFi innovations, and most are likely missing out on SushiSwap. It’s already one of the safest cryptocurrencies in the markets. SushiSwap is more than a digital currency provider, and we’ll discuss all its use-cases in this comprehensive review.
A Fishy Beginning
SushiSwap’s launch was controversial. Its creator(s) hid behind the pseudonym of Chef Nomi and remains unknown. Chef Nomi copied the Uniswap source code to form SushiSwap and made some improvements, such as adding a liquidity provider token, SUSHI.
SushiSwap launched as a liquidity pool within the UniSwap Protocol but transferred funds to its platform once designers finished revamping the code. The move had a significant impact on Uniswap, slashing liquidity on the protocol by about 70%.
The project raised brows in the community soon after the launch when the anonymous creator cashed out. On 5th September 2020, Chef Nomi sold his SUSHI tokens for ETH (worth $13 million) in what looked like an exit scam. The move caused a 76% decrease on the token’s price, moving it from $4.44 to $1.20.
As expected, the crypto community cried foul and Chef Nomi had to do some damage control for SushiSwap to survive. On 11th September, the anonymous creator penned a series of tweets apologizing to several key players in the DeFi industry, including SushiSWap investors. He also returned all the funds, gave control of the protocol to Sam Bankman-Fried of Almeda Research and let the Sushi community decide what amount he would get as the token’s creator.
The apology seemed to work for the crypto community as Sushi picked back its momentum, rising to $2.32 by 14th September 2020. At the time of writing this article, SushiSwap is trading at $17.27 on Coinmarketcap.
How Does SushiSwap Work?
Users on the protocol can band into different liquidity pools as defined by smart contracts. They just lock their assets into the smart contracts so traders can borrow at a fee. Secured borrowers indulge in profitable trades like arbitrage, leveraging their positions via these liquidity pools.
Users can also stake their SUSHI to earn xSUSHI tokens, which are also native to the platform and designed to increase profitability. When harvesting, users enjoy a percentage of the liquidity pool that’s proportional to their contribution. The payout is often profitable for users when liquidating their appreciated xSUSHI tokens.
SushiSwap runs efficiently by relying on SUSHI tokens to store and transfer value. The protocol rewards users with SUSHI tokens for locking their digital assets. There’s more:
- SUSHI tokens give users voting rights.
- SUSHI tokens qualify holders to a share of the 0.05% of fees that traders pay for borrowing.
Wait! What’s That About Voting? SushiSwap Governance Is Democratic
One of the best things about decentralized finance is that the transactions are peer-to-peer, without the need for third-party verifiers or escrow services. SushiSwap allows community democracy on just about anything concerning the protocol.
Every token holder can suggest governance changes and vote on proposals from other users. For example, a previous vote decided the platform should only mine 100 SUSHIs per day. A token holder can propose to change that daily mining rate.
Perhaps the most influential decision made by the community was the one immediately after Nomi returned the funds. The community voted to have 9 key players in the DeFi industry as the keyholders for the SushiSwap multi-sig wallet. Rober Leshner, the founder of Compound Finance, is one of those who were selected to safeguard the protocol’s development funds.
Understanding the SushiSwap Business Model
Here are some key takeaways from the protocol’s model.
- SushiSwap is a popular DEX that fosters privacy and users love it for fast, secure trades. Trading fees are capped at 0.3%, which is considerably low compared to the 5% that global giants like PayPal charge.
- SushiSwap shares 0.05% of all trading fees among SUSHI token holders.
- The SushiBar absorbs 0.25% of all trading fees, which are distributed proportionally to active liquidity providers.
- Staking on the platform yields daily profits, with rewards contracts paying out every 24 hours. SushiSwap staking rewards you with xSUSHI tokens, which you can convert to SUSHI tokens and liquidate them.
So, What Makes SushiSwap So Popular?
For starters, this platform earned a safety rating of 136 out of 3698 cryptocurrencies in months. Additionally, SushiSwap users love its community-based governance where everyone gets a say. It’s rare to find platforms that pay you for just holding native tokens.
Other Advantages of Holding SUSHI Tokens
- These digital coins are private because SushiSwap doesn’t impose ‘Know Your Customer’ policies. You can invest millions of dollars without seeking anyone’s permission, and you don’t have to ID yourself.
- You can speculate price movements and buy SUSHI tokens low only to sell high. The demand for these tokens grows as traders rely on liquidity pools to finance their operations.
- Cross-chain money markets make it possible for SushiSwap users to complete international transactions that are secure, private, and irreversible. You can pay a business in Canada for digital products while in South Africa or anywhere else in the world. You don’t need any third-parties to do it, and the payment is often immediate.
- Harvests qualify as capital gains, and users can apply for tax deductions in cases of losses.
This platform automated market making for users, and the decentralized exchange runs on Ethereum’s blockchain. However, SushiSwap is planning to expand to BentoBox lending as ETH gas fees continue rising.
In the meanwhile, you can enjoy the flexibility that comes with Ethereum’s expansive network of projects and dApps.
The SushiSwap ecosystem is user-friendly, and you can navigate the website easily. It segments functions, and the software partitions into four distinct products; SushiSwap Exchange, SushiSwap Liquidity Pools, SushiSwap Farms, and SushiBar Staking.
How to Use the SushiSwap Platform
You can access the web version at app.sushi.com. The homepage presents the menu and relevant analytics concisely so you can locate key functions in a matter of seconds. For example, critical functions are arranged vertically on the right-side menu. On the body, you can historically track the liquidity raised and changes in sales volumes.
The trend is often bearish, and as per this screenshot, SushiSwap’s liquidity was at $3.25 billion while its sales volume hit $0.418 on March 1st, 2020. The left-most top side lists the three highest yields, which were:
- USDP-DUCK: 451.64%
- USDC-DSD: 315.98%
- WETH-UWL: 282.00%
Who wouldn’t put money in safe prospects that could yield between 3-6X, short-term returns? Daily crypto traders are always looking for such opportunities, and SushiSwap does well to display the information prominently.
On the vertical menu on the left side, you can connect your wallet, view your portfolio, swap tokens, lend, farm, discuss in forums, and participate in governance democracy.
Start by connecting SushiSwap to your ETH wallet. For privacy, the platform allows a generous selection of non-custodial wallets, including:
- Coinbase Wallet
Connecting your wallet allows you to lock your funds into any of the liquidity pools that you prefer. The platform presents its liquidity pools as farms. Clicking the ‘Farm’ button on the menu presents countless liquidity pools with their ROI and liquidity stats.
You can predict the annual and daily percentage yields of every liquidity pool. Remember, your share is proportional to your contribution in the pool since SushiSwap communally shares revenues among users.
How to Stake in SushiSwap Liquidity Pools?
Before you stake any money, take time to research and learn the market. The website dedicates resources and time to blog about SUSHI and other tokens.
The protocol requires active liquidity miners to deposit equal amounts of a pair of crypto assets. Cross-chain interoperability enables SushiSwap users to create different pools.
Liquidity pools contain two evenly spread tokens. For example, the ETH-USDT pair is one of the most popular. To mine liquidity in that pool, you have to contribute $500 worth of USDT to stake ETH worth $500.
Users then swap their crypto assets for pool tokens. To maintain liquidity, the protocol calibrates asset prices depending on demand and supply. Traders arbitrage between SushiSwap and other DEXs, taking care of volatile situations.
You can contribute to attractive pools by approving your wallet to move the assets you are willing to risk. Best of all, users who lock their money can reclaim it anytime they want. Instant withdrawals are available, and you can also liquidate your mined harvests whenever you like.
The SushiBar provides more earning potential. Use the SushiBar to stake the SUSHI tokens you reap via liquidity mining to earn xSUSHI tokens.
The Tax Benefits of SushiSwap Harvests
Decentralized finance (De-Fi) is much more liberating than Centralized finance (Ce-Fi). Still, credit facilities are critical for De-Fi and Ce-Fi. De-Fi offers more benefits for lenders than Ce-Fi ever could, and it’s particularly advantageous on the taxation front.
Tax laws consider interests earned by lenders as personal income tax. For example, your tax liability grows when your savings in a bank earn about $3,000 interest in a year. The interest constitutes part of your taxable income.
If the savings devalue in the next year such that you lose a net value of $3,000, you cannot claim tax deductions. Capital gains qualify for tax deductions when you run losses, but interests aren’t tax-deductible.
SushiSwap users lend to traders with interests in mind. However, Chef Nomi worked towards favorable taxation for liquidity miners, and the rewards involved qualify as capital gains. Assets don’t gain value by directly lending to traders.
Users swap their assets for SUSHI tokens, and the SUSHI tokens gain value via demand and supply forces. Users realize profitability by swapping their tokens. Thus, SushiSwap users earn capital gains, not personal income.
Capital gains are tax-deductible, and you can file a claim with the IRS if you ever incur losses on the platform.
Recipe for Success: A Review of SushiSwap’s Updates in 2020
SUSHI token holders voted to pull down ‘Menu of the Week’ in favor of ‘Onsen.’ The new incentives program upholds the community spirit by integrating voted tokens into the liquidity mining program. The change attracted widespread adoption as SushiSwap earned trust through community governance.
The future is promising because SushiSwap settled for open-source ideas, objective debate, and blockchain democracy. Such conditions are appropriate for insightful, proactive decision-making and efficient policy implementation.
Since September 2020, this protocol was on a bumpy start. Chef Nomi’s mischief and pseudo-anonymity almost ruined it for SushiSwap, but the call for communal revenue shares was overwhelming. The transition into a decentralized autonomous organization instilled trust, increased security, and helped earn high safety rankings.
The SushiSwap Risk Factor
Liquidity pools (LPs) are smart contracts that hold digital funds involved in transactions. Hackers target LPs to steal the assets locked within, making LPs prone to cyber-attacks. Protocols can reduce hacking risks by consulting reputable security auditors.
SushiSwap engaged Quantstamp to review its security and identify risks. Quantstamp helped the protocol to identify and address ten minor security issues. SushiSwap then hired Peckshield for a security audit to further minimize risks.
You can secure your funds when using SushiSwap by using privacy wallets. Non-custodial wallets are safe because no one else knows your private keys.
While security risks diminish, users still need to consider the risk of financial losses. Crypto markets are volatile, and one or both of your farming pairs could lose value. In such cases, users suffer impermanent losses.
Timing is everything in these markets, and you should be patient when your stake suffers impermanent losses. Arbitrageurs rush to buy low from panicked miners, helping to pull prices upward.
If you are impatient, you likely won’t recover the lost value. Arbitrageurs will profit from your impatience, and loss becomes permanent if you prematurely withdraw devalued tokens from LPs.
SushiSwap empowers users to be market makers. You can decide which LPs to fund, and your decisions affect how asset prices move. Thus, every call you make on the platform affects your profitability, from staking to swapping and withdrawing tokens.
What’s up with SushiSwap in 2021?
This DEX plans to execute significant upgrades this year, and some include:
- Mirin will upgrade the V3 protocol, introducing new features like double yield and yield refinancing. Bentobox will hold all tokens, support multiple oracles, and reduce ETH gas fees.
- Minimal Initial Sushi Offering (Miso) will fundraise for new projects on the platform. You can participate in auctions or crowd sales and various project launches.
- SushiSwap is moving towards Zk-rollups for its Layer 2.
- Most notably, SushiSwap plans to migrate to a new domain that represents its diversity. If you buy a SUSHI token, you can propose your ideas and influence the new domain name.
SushiSwap Competitors: Can UniSwap and Balancer Upset SushiSwap’s Growth?
SushiSwap keeps receiving criticism for its history of copying designs and codes of other protocols. It copied and tweaked its basic code from UniSwap. SushiSwap also didn’t spare Yam Finance and Compound when borrowing features from them.
UniSwap also seeks to resolve liquidity problems that bother traders. This protocol allows users to handle various cryptocurrencies and rewards liquidity miners with native UNI tokens.
Just like SushiSwap, UniSwap pays liquidity providers with shares of trading fees. The shares are proportional to each user’s contribution to the LPs.
Both UniSwap and SushiSwap are DEXes that provide multiple liquidity pools for traders. They run on Ethereum’s blockchain, empowering users to access and trade with a wide range of crypto assets.
UniSwap came before SushiSwap and is doing better than SushiSwap. UniSwap is growing fast. The first-to-market status strengthened UNI tokens, but SHUSHI tokens are trimming down UniSwap’s market share.
Balancer is also a DEX that allows traders to exchange tokens. It attracts liquidity by offering capital gains for providers. The protocol empowers traders to simulate trades and sharpen analytical insights. Liquidity miners can join diverse LPs with only one asset.
Like SushiSwap and UniSwap, Balancer levies trading fees to incentivize liquidity providers and increase financing. Balancer is more flexible than SushiSwap and allows you more options with weights. Also, it empowers you to earn as traders rebalance your portfolio. Rebalancing is time-consuming and demands some specialized skills.
CoinMarketCap ranks Balancer 122nd with a $0.263 billion market cap, and SushiSwap 34th with a $2.53 billion market cap.
This liquidity market has been on a bullish growth since its launch, and users are becoming more aware of its underlying value. As the wider De-Fi markets expand, SushiSwap is curving its share aggressively.
Expert analysts are investing on this protocol, and trade volumes of $620,991,000 in a day signifies rising liquidity. If SushiSwap implements the ambitious protocol changes that we outlined above, the impressive streak may linger for a few years. However, major legal changes could upset the momentum.
SushiSwap is outgrowing all other DEXes and liquidity protocols because of its open-source philosophy. Chef Nomi created a protocol that upholds community interests, and it borrows the best aspects of its competitors.
The platform affords liquidity providers a rare opportunity to share the 0.05% of trading fees on the platform. Your SUSHI tokens will earn you some yield even if you don’t stake them.
Chef Nomi found success with the SushiSwap recipe. Watch out for this project as SUSHI tokens become more valuable with time.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com