Research Report About SushiSwap

13 min readSep 9, 2020

Author: Gamals Ahmed, CoinEx Business Ambassador

ABSTRACT

In an announcement from August 26th, a team of developers revealed the SushiSwap project — an initiative attempted to be “an evolution of Uniswap with SUSHI tokenomics.”

The team has taken one of the core concepts behind Uniswap — incentivized liquidity provision, and added further stimuli for those who decide to stake their tokens into the protocol. With Uniswap, liquidity providers receive a share of the trading fees of the corresponding pool for as long as they provide liquidity in it.

With SushiSwap, users can also provide liquidity and receive fee rewards, but they can also simply hold the native token called SUSHI and continue receiving part of the fees. The mechanism is similar to that of Uniswap.

0.25% of the fees go to the liquidity providers.
0.05% of the fees get converted back to SUSHI and distributed to SUSHI holders.

With Uniswap, liquidity providers receive 0.3% of the fees generated in the respective pool.

1.INTRODUCTION

As the Decentralized Finance (or DeFi) space evolves, an increasing number of novel financial platforms continue to emerge. We’ve seen how things like flash loans and yield farming (or liquidity mining) can be leveraged by investors to make money with their money.

Uniswap has solidified its position as one of the core DeFi protocols. In spite of its decentralized ethos and heavy reliance on smart contracts, however, users don’t have much of a say when it comes to its development direction.

SushiSwap, a new entrant to the field, promised to change that. And over $1 billion worth of value locked into the protocol — only a few days after launch — suggests that many would be interested in this change.

1.1 OVERVIEW ABOUT SUSHISWAP

SushiSwap is a fork of Uniswap with some key differences — most notably, the SUSHI token. The token has two functions at launch: entitling holders to governance rights and a portion of the fees paid to the protocol. In a simplified way, SUSHI holders “own” the protocol.

Both SushiSwap and Uniswap are fully decentralized protocols built on Ethereum for automated liquidity provisions. SushiSwap introduced the SUSHI token while UniSwap has no its own token. To learn Sushi tokens, the joiner needs to stake Uniswap LP tokens and will earn tokens from block 10750000 on. 100 tokens are created for every block. SushiSwap is a controversial project.

In short, Uniswap is a decentralized exchange protocol that works without an order book. Instead of an order book, it utilizes a model called automated market-making (AMM), where liquidity providers add funds to liquidity pools.

With Uniswap, LPs earn 0.3% of trading fees whereas on Sushiswap, LPs will earn 0.25% fees, with the remaining 0.05% being distributed to SUSHI holders.

The objective is to incentivize early liquidity providers with added incentive for bootstrapping the pools. In Uniswap, LPs earn fees so long as liquidity is provided. Sushiswap aims to add a more passive form of income with early LPs benefitting from the future traction of the protocol through SUSHI and the 0.05% fee.

In typical DeFi degen style, SushiSwap founder Chef Nomi made a call to arms for auditors to conduct a smart contract audit after the protocol reached $150M in TVL within the first 5 hours of launch. Quantstamp has since taken responsibility to audit the contracts alongside a 48 hour time lock on the governance contract to prevent any malicious activity from the founder. A rewards distribution of 10% has been set aside for the team for audits & operational expenses, an allocation which can reportedly be adjusted through governance.

In less than a week, SushiSwap has aggregated more than $800M worth of tokens, or about 80% of total Uniswap assets, according to Sushiboard, which tracks the project’s data.

Sushiswap as Uniswap meets yield farming. It’s similar enough: like Uniswap, it’s a liquidity provider that rewards those who put liquidity into its smart contracts with a portion of the trading fees.

But in addition to that, Sushiswap offers SUSHI tokens as an incentive for contributing to its liquidity pool. In that, it’s a little like DeFi lending protocols, which offer governance tokens as a reward for using them ,like yearn.finance’s YFI, Compound’s COMP or Aave’s LEND. Like these governance tokens, SUSHI can be sold on secondary markets.

SushiSwap in short:

SushiSwap is a Decentralized Finance (DeFi) liquidity provision platform that aims to be an evolution of Uniswap.
Initially, to encourage liquidity provision, liquidity providers can earn SUSHI tokens by staking Uniswap Liquidity Pool (LP) tokens in an initial set of available pools.
Once token swaps are enabled, 0.25% of all trading fees in any pool are proportionately distributed to active liquidity providers, while 0.05% get converted back to SUSHI (through SushiSwap) and distributed to SUSHI token holders.
taking SUSHI-ETH LP tokens on the SushiSwap platform also accords stakers SUSHIPOWAH, which are voting rights that allows SUSHI token holders to vote on governance proposals to shape the SushiSwap platform.

1.1.1 MISSION AND VISION

SushiSwap is designed as the next step forward in the Uniswap protocol design: an evolution. Taking Uniswap’s elegant core design, community-oriented features have been added to improve the design of the protocol, as well as provide further benefits to the actors involved.

1.1.2 SUSHI & UNISWAP

Uniswap, a venture capital backed project, meant to create a more open and customizable crypto exchange, is being challenged by an upstart unaudited adaption called SushiSwap.

Part of a trend of “Weird DeFi” projects — frequently food-themed — SushiSwap’s emergence last week is doing bizarre things to the market.

Uniswap was already on a tare. The automated money market (AMM) platform saw its trading volume climb to $953.59 million on Tuesday — a more than ten-fold gain over the past month. Further, its 24-hour trading volume is now 50% higher than on Coinbase Pro, the largest U.S.-based centralized cryptocurrency exchange.

Uniswap’s usage has grown so rapidly that it’s taken over the top spot among fee payers on the Ethereum network. Traders on Uniswap have paid $5 million (10,805 ETH) in transaction fees in the past 24 hours.

Meanwhile, SushiSwap has already moved into the №3 spot of payers of Ethereum “gas,” the unit used to calculate fees on the Ethereum blockchain. It launched Aug. 28.

SushiSwap, which provides a near-identical function to Uniswap but rewards liquidity providers with sushi tokens and a share in trading fees, popularity comes from a unique marketing strategy: For roughly two weeks (100,000 blocks) ahead of launch, users who stake liquidity provider tokens from Uniswap to SushiSwap will get 10X the liquidity mining rewards.

Some speculate this incentive may be driving traffic to Uniswap. “DeFi degens can amass LP tokens, which they can dump immediately into Sushi and take advantage of this brief period of extremely generous SUSHI distribution,” CoinDesk’s Brady Dale elegantly said.

In brief

Uniswap hit its highest daily trading volume ever — over $450m. This was propped up by the launch of DeFi governance token, Sushiswap
Sushiswap offers incentives for those contributing to its liquidity pool, in the form of SUSHI tokens
Sushiswap is yet to be audited, meaning it could be a very risky investment if things don’t pan out.

1.1.2.1 WILL NEW DEFI PROTOCOL SUSHISWAP’S GROWTH ECLIPSE THAT OF UNISWAP’S?

Sushiswap was designed as an improvement to Uniswap and provides additional liquidity through its own proprietary token, the SUSHI. Uniswap offers a 0.3% pool reward on trading fees, which is then proportionately distributed, to members of the pool, but Sushiswap is raising the stakes by providing 0.25% reward which goes to all pool members, while the remaining 0.5% is converted into SUSHI to be distributed to SUSHI holders, incentivizing those on the Sushiswap platform to make a switch. In its second phase, staked Uniswap Liquidity Pool (LP) tokens will be migrated into Sushiswap contracts.

“With SushiSwap, one can also provide some liquidity into a pool and earn rewards in the form of SUSHI tokens. However, unlike Uniswap, those SUSHI tokens will also entitle you to continue to earn a portion of the protocol’s fee, accumulated in SUSHI, even if you decide to no longer participate in the liquidity provision,” the announcement notes.

The project, however, has garnered some negative attention from advocates and experts in the DeFi space.

“I usually don’t opine about specific projects, but if I’m being honest, I hope this SushiSwap experiment fails. Forking liquidity will make swap prices worse for all users and make impermanent loss worse for all LPs. The only beneficiaries are the Sushi founders,” said Brendan Dharma, co-founder of Dharma HQ, in a tweet. “I’m just hoping the liquidity moves back to a single pool, as that is what’s best for trade quotes and LPs.”

At the end of last August, the growth seen on Uniswap has also been staggering as the TVL locked on the platform reflects a gain of 500% since August 27, according to data from DeFi Pulse.

1.1.3 DEFI NEWBIE SUSHISWAP LOCKS UP $1 BILLION, SUSHI PUMPS TO ATHS

Sushiswap, the newest DeFi project on the block which has nothing to do with real sushi, has actually locked up nine figures in just a few days after launch.

1.1.3.1 A BILLION-DOLLAR SUSHI

According to data from on-chain analytics site DeBank, Sushiswap liquidity miners have collectively locked up over a billion dollars in the project. The modus operandi is such: create a liquidity pool on Uniswap with of the tokens listed on Sushiswap, come back and deposit those LP tokens for farming SUSHI.

Interest rates are unlike anything. The Sushiswap dashboard shows pools of various projects, such as Ampleforth, Chainlink, and Synthethix, are doling out 1,000% annualized percentage yields to those who dare.

SUSHI itself has been on a roll. Data from Uniswap token tracking site Uniswap.Vision shows the tokens saw a multifold increase in value since August 30. They currently trade at $7.70, up from sub-$1 just two days ago.

With Sushiswap, the total lock-up volume of the Ethereum DeFi project has now exceeded the $11 billion mark. At the same time, SushiSwap’s lock-up volume also exceeded US$1 billion, ranking fifth in terms of lock-up volume. The top four projects are Aave (US$1.519 billion), Maker (US$1.492 billion), Uniswap (US$1.363 billion), and Curve. (1.061 billion US dollars).

Data from CryptoSlate’s proprietary analytics page shows the top 15 DeFi projects are all built on Ethereum, although the latter’s founder, Vitalik Buterin, is apparently not a big fan.

He said in a tweet earlier this week, “the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50–100%/year yield farming regimes makes major national central banks look like they’re all run by Ron Paul”.

Meanwhile, another possible catalyst for SUSHI’s price bump on August 31 was crypto exchange FTX announcing it was listing the tokens. Both spot and perpetual futures markets are now live on the exchange, with 3x leveraged products SUSHIBULL and SUSHIBEAR also trading for those who want to magnify their bets without the woes of maintaining margins and fees.

1.1.4 WHY HAS THIS SPURRED SO MUCH INTEREST?

The growth of liquidity mining (yield farming) as a valid method for token distribution has given rise to an abundance of new token launches. These aim to level the playing field for everyone involved with no premines, little or no founder allocation, and equal distribution

based on the amount of funds supplied. The tokens distributed through these liquidity incentives then grant governance rights to token holders. In addition, we already know that SUSHI holders are also entitled to a portion of the fees paid into the protocol by traders.

Anyone can submit a SushiSwap Improvement Proposal (SIP), which then SUSHI holders can vote on with their tokens. These can be minor or even major changes to the SushiSwap protocol. Instead of a more traditional team like Uniswap, the development of SushiSwap is in the hands of SUSHI token holders. A strong community can be a powerful asset for any token project, but this is especially true for a DeFi protocol.

1.1.5 PROTOCOL TRACTION

While there was skepticism about the project amongst crypto twitter at launch, the recent success of community-governed projects like yEarn and the transparency of the project founder has allowed SUSHI to create a cult-like following among hungry yield farmers.

Given the strong traction, SUSHI seems to have ruffled the feathers of some of the VC backed projects, claiming that SushiSwap is inditing a gambling culture in DeFi rather than the social movement it was founded on.

Despite the contention, Uniswap seems to be a direct benefactor of this SUSHI cooking event with total liquidity more than doubling since launch. This is best exemplified by a new record for Unsiwap, with 24h volume exceeding that of Coinbase for the first time.

Now, SUSHI holders are rallying around the newly launch governance platform, voting to increase rewards for SUSHI/ETH LPs, and add new pools to the protocol.

2.SUSHISWAP PROTOCOL DESIGN

2.1 LIQUIDITY PROVIDER INCENTIVES

Why would someone want to provide liquidity to SushiSwap, as opposed to Uniswap?

With Uniswap, liquidity providers only earn the pool’s trading fees when they are actively providing said liquidity. Once they have withdrawn their portion of the pool, they no longer receive that passive income. Moreover, as protocol gains traction, despite being early liquidity providers, they risk getting their return diluted as (bigger and wealthier) stakeholders such as venture funds, exchanges, mining pools join the protocol with a huge amount of capital.

With SushiSwap, one can also provide some liquidity into a pool and earn rewards in the form of SUSHI tokens. However, unlike Uniswap, those SUSHI tokens will also entitle you to continue to earn a portion of the protocol’s fee, accumulated in SUSHI, even if you decide to no longer participate in the liquidity provision. As an early adopter to help provider liquidity, you become a significant stakeholder of the protocol.

The earnings that you’ll receive from staking will be proportional to the amount of LP tokens you have staked versus the total amount of LP tokens staked. Unless you continue to provide liquidity, your holdings and corresponding reward earnings will gradually be diluted.

2.2 TOKEN DISTRIBUTION

They have designed the token distribution mechanics to make it as easy as possible for the existing Uniswap liquidity providers to start migrating to our protocol!

To start providing liquidity and earning SUSHI tokens, anyone holding Uniswap LP tokens can stake those LP tokens into the corresponding initial list of pools. Once done, they will start earning tokens once rewards starts on block 10750000. The list of eligible LP tokens can be added per on-chain governance. So it’s every one of us who decides.

At every block, 100 SUSHI tokens will be created. These tokens will be equally distributed to the stakers of each of the supported pools.

However, For the first 100000 blocks (~2 weeks), the amount of SUSHI tokens produced will be 10x, resulting in 1000 SUSHI tokens being minted per block. This is to incentivize early farmers and adopters of the protocol and to help in The Liquidity Migration™️.

The initial set of available pools:

CeFi Stablecoins: USDT-ETH, USDC-ETH
DeFi Stablecoins: DAI-ETH, sUSD-ETH
Lending Protocols: COMP-ETH, LEND-ETH
Synthetic Assets: SNX-ETH, UMA-ETH
Oracles: LINK-ETH, BAND-ETH
Ponzinomics: AMPL-ETH, YFI-ETH
Delicacy (2x reward): SUSHI-ETH

2.3 REWARD DISTRIBUTION

SUSHI is distributed to those who provide liquidity to specific Uniswap pools. Then, they can deposit their Uniswap LP tokens into the SushiSwap staking contracts to start earning SUSHI.

To incentivize the provision of liquidity for the SUSHI market, the SUSHI-ETH pool pays out double rewards. Shortly after launch, SUSHI voters voted on adding additional pools to be eligible for the distribution. This is the power of community governance!

The SUSHI reward distribution started at Ethereum block 10,750,000. The rewards are reduced after 100,000 blocks (or roughly two weeks). After these first two weeks of initial distribution, the liquidity tokens in the staking contract will be migrated to the SushiSwap contracts. This means that all Uniswap LP tokens staked on SushiSwap will be redeemed on Uniswap for the tokens they represent, and new liquidity pools will be created with them on SushiSwap. This will effectively mark the launch of the SushiSwap exchange.

With the current Uniswap configuration, 0.3% of all trading fees in any pool are proportionately distributed to the pool’s liquidity providers. In SushiSwap, 0.25% go directly to the active liquidity providers, while the remaining 0.05% get converted back to SUSHI (obviously through SushiSwap) and distributed to the SUSHI token holders.

2.4 THE LIQUIDITY MIGRATION

Around the first 100000 blocks from the protocol’s inception (~2 weeks), they will be migrating all the liquidity tokens staked onto SushiSwap contracts. This migration will involve taking all of the Uniswap LP tokens staked on SushiSwap, redeeming them on Uniswap for the respective token pairs, and initializing new liquidity pools from those tokens. These new

pools will be almost identical to the standard Uniswap pool, with the added feature that any fees accrued will be distributed to SUSHI token holders through the logic outlined above.

Once the migration is done, the liquidity converted will be fueling the first sets of SushiSwap pools, and will bring the protocol into operation immediately. The stakers don’t need to do anything and will continue to receive SUSHI token rewards from providing liquidity going forward.

2.5 PROTOCOL USAGE

At the protocol and smart contract level, SushiSwap shares an identical interface to Uniswap. This means that if your protocol is currently compatible with Uniswap, it should be relatively simple to integrate with SushiSwap.

2.6 SMART CONTRACTS

The followings are the list of the contracts with rough explanation:

SushiToken: The token contract, with COMP/YAM voting functionality.
MasterChef: Deposit LPs tokens to farm SUSHI.
SushiMaker: Collect revenues, convert to SUSHI, and send to SushiBar.
SushiBar: Stake SUSHI to earn more SUSHI.
Migrator: Migrate MasterChef LP tokens from Uniswap to SushiSwap.
GovernorAlpha + Timelock: Governance stuff from Compound.
UniswapV2: UniswapV2 contracts with small modification for Migration.

2.7 SUSHI TOKENOMICS

In the first phase of the project, traders stake tokens representing deposits in Uniswap’s liquidity pools (Uniswap’s LP tokens), in exchange for SUSHI tokens. In the second phase, traders are meant to migrate those Uniswap LP tokens for the underlying assets and take them to the SushiSwap DEX.

Positioning themselves as “an evolution of Uniswap with SUSHI tokenomics” SushiSwap uses a Yam-inspired interface to present traders with a “menu” of Uniswap liquidity positions they can lock up in exchange for the SUSHI governance token.