How SushiSwap Works

SushiSwap, a new, decentralized finance (DeFi) protocol, has gained much momentum within four days of its protocol announcement. At Nightly Crypto, we believe the $SUSHI token will have large gains for investors.

A Uniswap fork, SushiSwap, has already hit more than $700 million in total value locked.

What differentiates SushiSwap from Uniswap is the governance token SUSHI. Uniswap doesn’t yet have its governance token and offers collected trading fees to its liquidity providers. SushiSwap, on the other hand, would offer SUSHI tokens to liquidity providers when the protocol’s mainnet goes live in about two weeks.

Specifically, Uniswap currently distributes 0.30% of all trading fees as rewards to liquidity providers in any pool. SushiSwap, on the other hand, would offer 0.25% to liquidity providers, while the remaining 0.05% would get converted back to SUSHI tokens and get rewarded. This means liquidity providers that provide the most liquidity would get most SUSHI tokens, which can then be traded, as well as be used to cast governance votes.

SushiSwap is essentially a fork of Uniswap plus an incentivized token. And the experiment is explicitly a test to see if, with the right incentives, a community will leave a protocol for a new competitor.

Instead of just earning fees for being a liquidity provider (LP) on Uniswap, you can earn the same fees plus the SUSHI token. Martina Krung, a crypto analyst, calls this strategy “vampire mining.”

Essentially, investors can make free money for doing the same Uniswap stuff, and from the looks of it, it’s working. Already SushiSwap has earned the equivalent of 79.3% of all of Uniswap’s liquidity.

The SUSHI token is also mooning, causing even more of a stir. SUSHI is up 1,278% in just three days. At first glance, it would appear that everyone is getting rich (and you’re not).

Everyone knows that with high gas fees, yield farming is becoming more and more of a whale’s game. And while large bag holders can continue enjoying the lion’s share in the beginning, winning projects like SushiSwap reveal how smaller investors can still enjoy an incredible upside by scanning token listings associated with the latest farming trend.

📈 Origin

In the two years since its launch, 🦄 Uniswap has solidified its position as one of the mainstays in DeFi. Along with that, their protocol design has become a standard in and of itself, one in which many projects have come to derive its mechanics from.

With that, SushiSwap was designed as the next step forward in the Uniswap protocol design: an evolution. Taking Uniswap’s elegant core design, they’ve added community-oriented features that we believe help improve the design of the protocol, as well as provide further benefits to the actors involved.

🎨 Protocol Design

💧 Liquidity Provider Incentives

Of course, one of the natural questions that many may have is: “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.

💸 Reward Distribution

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 📈.

🏁 How You Can Participate

You can start depositing LP tokens to the MasterChef contract using the interface at https://app.sushiswap.org

$SUSHI tokens can also be purchased on Uniswap or Binance. The SUSHI tokens were listed on the largest exchange in the world, Binance, last night.