Decentralized finance (DeFi) exists to offer a simpler and better alternative to traditional financial services. Its goal is to allow anyone who has the internet to access affordable financial services without relying on a central authority.
According to the World Bank, there are about 1.7 billion people who do not have a bank account across the world and only two-thirds of them own a mobile phone. It’s widely believed that as DeFi continues to increase in adoption, it will improve financial inclusion in the world.
One of the DeFi platforms that are enabling financial inclusion through its decentralized exchange and financial services is SushiSwap. In this article, you will learn about SushiSwap, how it works, what’s unique about it and the utilities of its Sushi token.
What is SushiSwap?
SushiSwap is a decentralized exchange that allows people to exchange crypto in a peer-to-peer manner. The trades are executed via a smart contract (a computer program) that automatically performs trades) that runs on the Ethereum blockchain.
To facilitate trades on the exchange without relying on a central authority, SushiSwap relies on liquidity pools. These pools are where users lock up their assets into a smart contract so that other traders can trade effectively. SushiSwap rewards users who provide liquidity or funds for the exchange to help meet the platform’s trading demands
SushiSwap was created as a fork (split from an existing platform) of Uniswap’s source code in 2020. What makes SushiSwap different from Uniswap are its significant community-oriented features such as staking rewards and a governance voting mechanism powered by its governance token, Sushi.
Anyone who connects their Ethereum wallet to their SushiSwap account can add liquidity to SushiSawp pools. The assets in a liquidity pool are added in a 1:1 ratio. For instance, if a user wants to add 4 ETH worth of liquidity to the Sushi-ETH pool, they need to convert 2 ETH into Sushi via the Swap function. Then they can add the equal worth of both assets to the pool.
In addition, users who provide assets to a liquidity pool will receive SushiSwap Liquidity Provider (SLP) tokens. These tokens allow users to reclaim their funds and any crypto fees earned from the pool, whenever they want to.
SushiSwap Use Case: Staking
Sushi tokens can be used to earn more rewards by staking them on SushiBar, a feature on SushiSwap that is used for staking. Staking Sushi on SushiBar allows users to earn the xSushi token.
Holding the xSushi tokens are profitable for users because it will increase in value. What guarantees this is that the fees from the SushiSwap exchange platform are often sent to xSushi token holders as rewards. For instance, when users make trades on the SushiSwap exchange a 0.3% fee is charged. Then 0.05% of this fee is sent to the SushiBar pool as Liquidity provider tokens (LP tokens).
These earned LP tokens are later sold daily on exchanges to buy Sushi tokens. Then the newly bought Sushi tokens are shared equally between all the xSushi holders in the pool.
Due to the way the rewards are generated, the price of xSushi will increase with the value of Sushi. However, the fees generated into the SushiBar will stop being distributed after some time.
In addition, with the launch of Shoyu, SushiSwap’s NFT marketplace, Sushi token holders who stake their tokens for xSushi will also be eligible to earn 2.5% of every NFT trade executed on the Shoyu NFT marketplace.
SushiSwap Use Case: Reward for providing liquidity on Onsen
SushiSwap has a unique mechanism where new tokens can be added to the exchange without the need for the token’s team to seek liquidity from users. This is known as Onsen. Onsen is a reward system on Sushiswap that gives rewards to users who provide liquidity for new tokens. Sushi tokens are given as rewards for users who provide liquidity on Onsen.
This makes the Onsen menu another source of earning interest for users. Tokens selected to be on the Onsen “menu” are given an allocation of Sushi tokens to reward those who provide liquidity.
The advantage of being on the Onsen menu for a new token is that the projects don’t need to rely on their communities to provide liquidity for their tokens, because Sushi now does it for them. This reduces the risk of impermanent loss, as there is enough liquidity for users to trade the new token.
This attracts new coins to the SushiSwap market, and new coins increase the trading volume on SushiSwap. New tokens are chosen to be on the Onsen menu based on the quality and demand of their product by users. If the quality and demand for tokens on the menu remains high, they can remain on the Onsen menu indefinitely, or be added to the permanent Sushi menu.
SushiSwap Use Case: Voting
Sushi token is a governance token that can be used for voting on proposals by its token holders.
The SushiSwap platform fosters a working community-powered governance structure. However, while voting on other platforms makes use of an on-chain voting system, or a combination of on-chain and off-chain voting, SushiSwap’s governance completely makes use of an off-chain system.
Voting on SushiSwap takes place on Snapshot — a decentralized and priceless voting dashboard. Firstly, proposals need to be created on the SushiSwap Community Forum for deliberation before it is moved to Snapshot for voting. However, only proposals that are widely supported in the forum will be moved to the snapshot for proper voting.
The voting metric used in the SushiSwap Snapshot is SushiPOWAH. To become an eligible voter, a user must hold Sushi. Here is what can determine the number of SushiPOWAH;
1 Sushi token held = 1 SushiPOWAH
1 Sushi in the Sushi-ETH pool = 2 SushiPOWAH
A new proposal must have 5,000,000 votes before it can be implemented. When proposals cross the 5,000,000 voting threshold, the decision that has more votes determines whether the proposal is adopted or rejected. Successful proposals are then executed by the core development team or Operation Multisigs, headed by an unknown developer named OxMaki.
What Makes SushiSwap Unique?
As a decentralized exchange, SushiSwap distinguishes itself from other decentralized exchanges by getting rid of order books while still ensuring there is little or no liquidity problems. Although it is similar to Uniswap in many ways, SushiSwap stands out by adding some important changes to how the platform runs by increasing the ability of network participants to influence its future.
SushiSwap’s main innovation was the introduction of the Sushi token as a reward for users who provide liquidity. The token offers additional rewards by qualifying their holders to continue earning a percentage of SushiSwap fees, even after they’ve stopped providing liquidity. This attracts Uniswap users who need more ways to earn passive income from assets.
Furthermore, the Sushi token also solves Uniswap’s lack of decentralization by providing governance rights to Sushi token holders. In the same vein, SushiSwap’s “fair launch” approach to token distribution, eliminates venture capitalists from having a big portion of the token allocation.