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SushiSwap: The story so far and what happens next

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If you only have time to look at one hasty food-themed Uniswap clone, make it SushiSwap.

Update 7 September 2020: Since this article was published the SushiSwap creator cashed out a quarter of the project's developer funding pool, worth $13 million worth at the time, without notice. This resulted in some minor hysteria and scam accusations.

Since then, the chef has handed the keys to the project to Sam Bankman-Fried, founder of Alameda and the FTX cryptocurrency trading platform, and a significant SUSHI stakeholder.

According to Bankman-Fried, the plan now is to continue the planned migration and move on more or less as if nothing happened.

Uniswap is a peer to peer trading app and liquidity pool on Ethereum. It would be technically correct, but also misleading, to say it quickly became Ethereum's dominant crypto swapping dApp.

While the bulk of the growth happened quickly, it only occurred after years of hard work from its developers.

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In August 2020 Uniswap accounted for more than half of total decentralised exchange (DEX) volume. Then someone had a brainwave, which was SushiSwap's cue to try to steal a cut of the action.

SushiSwap enter stage left

SushiSwap is a Uniswap competitor. It basically literally copied Uniswap, then slapped some cute branding and a SUSHI token on top.

SUSHI token holders are paid a cut of the SushiSwap trading fees while liquidity providers (LPs) are awarded fresh SUSHI tokens in the hope of giving them an extra incentive to provide liquidity to SushiSwap instead of Uniswap.

SushiSwap aims to be community governed, with governance power given to the SUSHI holders who provide liquidity to the SUSHI/ETH pool.

A cut of newly issued SUSHI tokens is set aside for development, with SUSHI voters deciding whether to approve grants and how much to award volunteer developers. However, Chef Nomi, SushiSwap's pseudonymous founder, is still making most of the final decisions and doing most of the work.

The big idea behind all of this is that SushiSwap redirects its profits back to the community that owns and services it, while Uniswap has to direct its profits to a closed handful of its investors instead. The functional end result is that SushiSwap can theoretically pay its users much fatter rebates than they could get on Uniswap, theoretically making it a much more compelling and successful product.

Currently, SushiSwap is temporarily paying out extra-large SUSHI portions to its LPs in an effort to bootstrap growth and rack up enough liquidity to compete with Uniswap. When people talk about farming SUSHI, they're talking about providing liquidity to SushiSwap in return for these temporary extra large rewards. These supersized SUSHI rewards will only last for two weeks (we're about one week in as of 4 September), after which they will reduce sharply to bring SUSHI's inflation rate to a more sensible level.

The way it works is essentially that LPs provide liquidity to Uniswap as usual, but they can also earmark portions of their Uniswap liquidity for SushiSwap. These earmarked portions then earn the SUSHI rewards, while continuing to provide liquidity for Uniswap as usual.

But when the time is right, SushiSwap will migrate all those earmarked funds out of Uniswap and use them to kickstart its own competing crypto swap platform, at which point SushiSwap will be live and operational.

The "right time" for this was originally going to be about two weeks after SushiSwap was revealed to the world, right as the extra-large SUSHI farming rewards stop, but circumstance has seen the timeline accelerate.

The new go-live date for SushiSwap is now as soon as is reasonably possible, which brings the story of SushiSwap to a major inflection point.

On cue, exit stage right

SushiSwap has been wildly successful so far, purely on the basis of attracting LPs with fantastically high SUSHI rewards. SushiSwap's total value locked is now equivalent to about 75% of Uniswap's, and in several Uniswap liquidity pools more than 98% of funds have been earmarked for SushiSwap.

On paper, those numbers mean SushiSwap could enjoy a wildly successful migration, simultaneously crippling Uniswap and setting itself up with deep liquidity pools if it goes live today.

But in practice it's not so clear.

Firstly, because the rates paid to Uniswap and SushiSwap LPs is dynamic. The smaller the liquidity pool gets, the larger the share of fees that goes to the remaining LPs. If liquidity migrates from Uniswap to SushiSwap en masse, the remaining Uniswap LPs will see their earnings increase (assuming everything else stays the same), which could help tip the scales back in Uniswap's favour.

Secondly and much more importantly, it's not clear whether SushiSwap LPs will stick around if they're no longer being paid ridiculously high SUSHI rewards. If SushiSwap migrates funds right as the temporarily extravagant SUSHI rewards end, it puts itself at serious risk of total collapse as LPs take the safe path of just bailing out and going back to Uniswap right before the big migration.

Indeed, that would be the smart thing to do. Sticking with SushiSwap during the migration and without the extra large SUSHI rewards would mean taking an enormous risk for practically zero chance of a commensurate reward. Forcing LPs into that position would probably be a tremendous mistake.

Hence the accelerated timeline.

The decision to migrate funds before the end of the SUSHI bonuses was put to the community for a vote, and it passed with ~90% support. So now that the community has signalled support for the move, Chef Nomi is cooking up the migration contracts while other community members put forward plans for the SushiSwap UI and other essential tools, assisted by boundless inspiration from Uniswap.

This gives LPs a much better reason to stick around through migration, and should give SushiSwap a much better chance of maintaining the necessary liquidity to be an effective and competitive crypto swap platform. The migration, due to happen any day now, could be a make or break moment for SushiSwap.

Assuming SushiSwap survives the migration with its liquidity and community intact, it turns into a more conventional competition against Uniswap to provide the best product. Here, one of the most obvious targets for both platforms is the implementation of a safe layer 2 scaling solution to help cut gas fees when using the platform.

Nutritional information

Is SUSHI healthy?

Some arguments say no.

Firstly, some Uniswap developers are understandably a bit miffed that after years of work someone just came along and cloned everything they've done to spin up a new competitor in two weeks flat, while probably making a small fortune in the process. It is, as they say, "a shitty move".

Secondly, it sets a disturbing precedent of liquidity vampirism while arguably running counter to the best interests of the end user. By splitting liquidity across multiple platforms, users end up losing more to slippage and getting worse deals on both platforms.

And of course, SushiSwap's so far successful move has attracted another slew of imitators like KIMCHI, which is basically just SushiSwap with even higher early rewards for LPs token rewards. While most (or maybe all?) of those followup imitations are failing fast, it still highlights the risk of liquidity being further fragmented by more imitators if SushiSwap succeeds.

Plus, thanks to record high Ethereum gas fees, SUSHI farming has become an expensive past time better suited to whales than everyday fish. The bulk of SUSHI wealth and governance power is almost certainly flowing to a small handful of whales. SushiSwap fans will often say the project is all about the noble goal of liberating wealth from venture capitalists and giving it to the people, but in practice it's still more about profits shifting from one small group to another small group.

As Uniswap founder Hayden Adams points out, the sheer speed and volume of SushiSwap's growth in funds locked clearly shows that whales account for most of the meat in SushiSwap.

Food for thought

On the other hand, the fact of the matter is that no one can stop projects like SushiSwap from happening, regardless of any of those points. And more importantly, the SUSHI token offers a solid value proposition and a good reason for holders to use SushiSwap over Uniswap as long as it works equivalently well.

It's also interesting to consider some of the attention SushiSwap has gotten from centralised exchanges. Binance and Huobi listed SUSHI just a couple of days after its release, while some other large exchanges also appear to be examining SUSHI more closely than other foods.

While it's tempting to write that off as centralised exchanges going in search of short term transaction fee revenue from a trendy token listing, it's also plain to see that most exchanges don't actually blindly list whatever food-themed coin is trending at the time, within days of its release.

The attention may be warranted though, as exchanges have a vested interest in the rise of a new automated market maker.

Beyond distributing more fees to token holders, SushiSwap also has a couple of other things Uniswap doesn't, such as a solid looking claim to being somewhat decentralised and community owned, and an anonymous founder. Both are potentially nice features for exchanges looking for a fair-ish playing field.

SushiSwap may just be a Uniswap clone with a few small tweaks and lightly grey ethics, but if it goes well the end result could be more impactful than it seems.

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Disclosure: The author holds cryptocurrencies including SUSHI at the time of writing

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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