SushiSwap is one of the largest decentralized exchanges in the crypto space. Its token, SUSHI, is what fuels the whole ecosystem – that often made headlines for its turbulent past.
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What is SushiSwap and how does it work? In this article we will tell you all you need to know about one of the largest decentralized exchanges.
What is Sushi?
Sushi is an Ethereum-based decentralized platform able to offer the crypto services supported by the decentralized financial system.
Sushi DeFi protocol also includes one of the largest decentralized exchanges (DEXs), with a TVL (Total Value Locked) of over $3 billion as of the time of writing.
The beginnings of this DeFi platform were turbulent that ended up contributing to the success of Sushi, whose birth still remains one of the most controversial cases of the crypto space.
Sushi is very similar to another notable DeFi protocol, Uniswap, which is no coincidence.
In 2020, Chef Nomi was mapping out how to strategically create a profitable decentralized exchange. Uniswap was already attracting the majority of DeFi users, so a new platform needed a unique rewarding system to motivate users to participate in said platform. Sam Bankman-Fried, CEO of FTX, offered around $5 million worth SUSHI because he wanted to be directly involved in the project.
The solution was found by drawing from the source. In the attempt to compete with Uniswap, SushiSwap was created as a fork of the popular DeFi protocol. Higher incentives were granted to move to Sushi.
The reward system consisted of providing higher rewards to all those users who deposited Uniswap tokens on SushiSwap, which were higher than those offered by Uniswap.
While successful, this strategy was later defined as a ‘vampire attack’, because it allowed Sushi to drain liquidity from Uniswap.
Sushi managed to collect over $800 million in cryptocurrency and brought more popularity to both protocols.
All was well until the week after the launch of SushiSwap. Chef Nomi committed what is known as a ‘rug pull’, which is a type of scam in the crypto arena where the founder of a project takes the money of investors.
Chef Nomi took what was worth 14 million of SUSHI and Ether at that time.
This, of course, affected the Sushi project negatively. A new team was created to solve the problems related to the deceitful behavior of the founder, and to keep the project alive. This operation managed – along with the apologies of Chef Nomi and the restitution of the funds – to clear the name of the Sushi crypto project.
How does SushiSwap work?
SushiSwap is the Sushi DeFi exchange. Decentralized exchanges (or DEXs) exploit the advantages offered by blockchain technology and smart contracts to comply with the core principles of cryptos:
- They support anonymity. Since DEXs are based on smart contracts, they reduce the counterparty risk and don’t need users’ personal details – mainly asked to resolve possible disputes.They allow crypto pairs trading and swaps – that is, you can use your crypto asset to get the correspondent amount of another crypto asset
- All transactions are directly recorded on blockchain
- Buyers and sellers are connected not through order books – as in the case of CeFi exchanges – but via liquidity pools, where anyone with an internet connection and a crypto wallet can autonomously deposit liquidity – the so-called liquidity providers
To make the whole system work, SushiSwap uses a model shared by other DEXs – AMM.
Automated Market Makers (AMMs) are models based on mathematical formulas that allow the automatic settlement of transactions and keep prices in line with the market price by setting fixed exchange ratios among crypto pairs.
Simply put, smart contracts make it possible to automate each operation performed on the exchange, and at the same time allow them to be recorded directly on the blockchain, since there is no central database to manage liquidity.
They collect info on prices thanks to price oracles, and manage to keep prices fair by setting specific equations. Otherwise, anyone could set different prices for crypto pairs, even far from the market price, and this would make DEXs unprofitable.
Despite this system, traders still find arbitrage opportunities on DEXs – as long as liquidity is not rebalanced among pools. This is also due to supply and demand principles and a fixed rate for liquidity providers fees may cause what is known as impermanent loss . This kind of loss occurs if a cryptocurrency suddenly loses value after being deposited into the liquidity pool.
So, even if a decentralized exchange like SushiSwap has downsides, consider that DEXs are pivotal to financial inclusion, since they allow anyone with an internet connection to get access to financial instruments.
The whole ecosystem is fueled by the Sushi token – SUSHI. This Ethereum token is not only involved in the reward system, but it’s also the cryptocurrency that allows the whole Sushi community to actively participate in the Sushi project.
In fact, being a governance token, SUSHI allows users who hold it to vote and participate in the decision-making process that establishes the strategies to determine the future of the decentralized protocol, better known as governance.
Moreover, users who stake SUSHI on SushiSwap get some of the fees produced by any swap on SushiSwap.
SUSHI has a limited supply – the total supply is set at 241,633,805 SUSHI, while the maximum supply is set at 250,000,000 SUSHI.
What you can do with SushiSwap
SushiSwap allows you to benefit from several DeFi services.
Here are some things you can do on SushiSwap:
- You can use liquidity pools. DEXs need users to get liquidity, since there is no central authority that can collect liquidity or institutional investments. For this reason, liquidity providers are rewarded (currently, the share of the fee for LPs is 0.25% on SushiSwap). Liquidity pools are the alternative of order books: thanks to these pools buyers can meet sellers, and vice versa, but it’s important to note that each liquidity pool is a single market for each crypto pair. Users who can’t find the liquidity pool they’re interested in can create a new pool, funding it with crypto assets according to a specific exchange ratio.
- You can become a farmer. This is strictly related to your activity as a liquidity provider. Instead of earning fees, when you use yield farming you’ll get SUSHI rewards.
- You can stake. When you stake on SushiSwap you earn not only SUSHI tokens, but also xSUSHI – tokens that you earn on the SUSHI rewards you’ve already earned. xSUSHI holders also earn part of the fees – 5% – charged to swap on SushiSwap.
Sushi vs. Saddle
As mentioned, DEXs also have downsides, which are mainly related to slippage and impermanent loss.
If you think about that, both problems are strictly related to the volatility of crypto assets:
- Slippage – occurs when there is a difference between the market price and the price at which you execute a trade mainly affects your trades when a crypto asset is highly volatile
- Impermanent loss – the loss in value experienced by a token after you deposit it in a liquidity pool – mainly occurs when a token is volatile
Due to this, Saddle focuses on stability, which allows us to offer our users a more stable and safer environment for their crypto assets.
Saddle is able to use bridges that link liquidity pools and to offer you extremely low slippage trades because of our virtual swaps and the use of Synthetix,
SushiSwap, the decentralized exchange, and SUSHI, the Sushi token, are two fundamental elements of the Sushi ecosystem.
Born as a fork of Uniswap, SushiSwap went through hard times when its founder, Chef Nomi, committed a rug pull: the intervention of a new team of developers and crypto personalities, along with the return of the funds, helped SushiSwap to become a stronger DeFi project and one of the largest decentralized exchange in the crypto space.
As any other DEX, SushiSwap can have downsides, but Saddle managed to solve some of the main issues related to the DeFi space thanks to its focus on stability and slippage reduction.
Discover more about Saddle and its decentralized exchange.
Learn more about Saddle.