DeFi 101: What is SushiSwap (SUSHI) and How does It Work?

2021/07/28 09:04:33

DeFi is now a $67.45B market and is growing faster than ever. A significant portion of this growth came from different AMM-based decentralized exchanges (DEX) that allow peer-to-peer exchange of assets through liquidity pools instead of a traditional order book approach used by central entities.

The Total Value Locked (TVL) in Defi currently stands at $54.63B, and at its peak during the 2020-21 bull run, the TVL surpassed $86B due to a large amount of activity. Total value locked represents the number of assets that are currently being staked in many different Defi protocols.

Source: Defi Pulse

If we dig deeper into the Defi categories, we will see that DEXes across different protocols account for more than 50% of the total value locked in the entire Defi space, followed by DAOs and lending protocols like Aave and Maker.

The majority of the Defi activity is happening on Ethereum, but due to its underlying scalability problems, the market is shifting towards more optimized and robust smart contract platforms like Binance Smart Chain (BSC).

Source: The Block

Today, we will be discussing SushiSwap, the third largest multi-chain DEX platform by TVL. SushiSwap is more than just a DEX platform, you can swap your tokens, earn and stack yields, lend, borrow, leverage all on one decentralized, community-driven platform.

What is SushiSwap?

SushiSwap started as a fork of Uniswap and has grown to become one of the largest protocols in the Defi ecosystem. At its peak this year, SushiSwap had a weekly trading volume of more than $9B, surpassing every major DEX platform in existence.

Source: SushiSwap

SushiSwap currently represents 18% of all DEX activity on the Ethereum blockchain. Sushi’s vision for SushiSwap is to merely be a piece of a synergistic ecosystem of DeFi products. Sushi’s partnerships with promising Defi protocols such as Yearn and AAVE are part of an aggressive expansion strategy to become more than an AMM-based exchange.

SushiSwap AMM

SushiSwap is a multi-chain AMM-based DEX platform, and they have deployed their Sushi contracts to five other blockchains, including Fantom, Binance, and Polygon (previously MATIC network). Just like Uniswap, SushiSwap uses a Constant product market maker (CPMM) formula to create prices.

The users on the network can supply liquidity to pools (x, y) and earn a portion of the trading fees based on their share of the pool. For every single trade on SushiSwap, there is a 0.3% trading fee which is one of the lowest compared to other DEX platforms.

0.25% of every trade is distributed to liquidity providers, and 0.05% is distributed to xSushi stakers. xSushi is the Governance and Staking pool of SushiSwap, where users can stake their tokens and earn rewards.

SushiSwap has also partnered with Yearn Finance to release DeriSwap, strengthening its position in the market. DeriSwap combines Swaps, Options and Loans into a capital efficient contract, and combines the use of derivatives and lending to the SushiSwap’s liquidity.

Mirin - The SushiSwap V3 Update

SushiSwap has released the V3 version of their protocol, codenamed, the Mirin. This upgrade will include several groundbreaking features such as:

  • Franchised Pools
  • New LP Curve options
  • Double Yield
  • K3PR Yield Rebalancing
  • 1-Click Zap features to save on gas

The Franchised Pools are basically the exchange-backed pools that will allow SushiSwap to increase its liquidity by onboarding liquidity providers from centralized exchanges. Exchanges can offer Sub-Pools and control all the fees, and also have the option to launch their own governance token.

The new LP Curve options include Rebalancing Curve and Bonding Curve. Rebalancing Curve is a constant mean market maker type curve used in Balancer, and the Bonding Curve is used by Curve Finance that provides a more capital-efficient way of swapping stablecoins.

The K3PR Yield Rebalancing is an automated rebalancing tool that calculates and compares various LP opportunities and switches your asset into the most optimal pair. It also considers gas fees to decide where to allocate the liquidity for optimal returns.

Wrapping Up

SushiSwap has a native governance token called SUSHI, that can be used in various staking and governance activities. Sushi’s vision is to become the home of defi. They are going beyond just being an AMM-based exchange and plan to offer various Defi products for lending, borrowing, staking, and yield farming.

SushiSwap is a fork of Uniswap, and it is slowly gaining momentum and is giving intense competition to Uniswap with its multi-chain and multi-products approach. Do you think SushiSwap will take over Uniswap to become the largest AMM-based DEX on Ethereum?


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