Decentralized finance is gradually reshaping the general idea of financial inclusion. One study shows that the total value of locked assets in the DeFi space is more than $50B. From the data, it’s clear that users are looking for financial alternatives that can bypass traditional systems.
Today, the DeFi ecosystem is home to numerous protocols that cover a broad range of areas like yield farming and lending. Fitting this profile is Sushiswap, a decentralized exchange running on the Ethereum blockchain.
Sushiswap: A Brief Description
Sushiswap was officially launched in 2020 as a Uniswap hardfork. Essentially, the protocol used Uniswap’s source code to operate as a separate DEX. As such, Sushiswap allows users to trade digital tokens without the intervention of third parties. Today, the decentralized exchange has locked assets worth $729M.
How Sushiswap Works
As mentioned before, Sushiswap represents a decentralized exchange that runs on a blockchain. This fact means that the exchange uses smart contracts to execute trades in a peer-to-peer environment. DEX platforms can operate on different systems which mainly include automated market makers (AMMs), DEX aggregators, and Order Books DEX.
In this case, Sushiswap uses an automated money maker as its trading method. The exchange leverages liquidity pools instead of order books to link buyers and sellers. Users take part in contributing funds of a particular digital asset to a liquidity pool. This, in turn, provides liquidity for other traders within the Sushiswap platform. Users are therefore matched with liquidity providers’ funds to foster a peer-to-peer trading system.
Liquidity providers also earn a certain amount of reward for contributing their digital assets. The rewards come from a portion of the platform’s trading fees.
Specifically, Sushiswap allows providers to earn a 0.25% fee from any token swap. While it may seem like a complex process, the smart contracts within Sushiswap’s blockchain are responsible for carrying out the entire procedure.
How to Join Sushiswap
New users can join Sushiswap with their Ethereum-based wallets. It can include popular wallets like MetaMask or Trust Wallet. Once the wallet is successfully set up, users can proceed to connect their wallets with Sushiswap’s dapp.
Getting Started as a Liquidity Provider
Users can become liquidity providers on Sushiswap and generate rewards from their contributions. At this point, traders may opt to acquire the exchange’s native token dubbed SUSHI. Users then select a liquidity pool they would want to engage with, accompanied by the following steps:
- Select the liquidity tab option on Uniswap
- Link a digital wallet and select “+New Position.”
- Split the digital tokens evenly, for instance, an even number of SUSHI and ETH tokens
- Click on the “confirm adding liquidity” option and approve the split
Once that is done, users can receive their SUSHI-ETH LP tokens from Sushiswap. It is worth noting that LPs only receive their 0.25% fee reward based on the amount of SUSHI-ETH deposited.
Kashi: the Lending Arena
Asides from enabling the trade of digital tokens, Sushiswap hosts a lending smart contract known as Kashi. The lending feature applies a similar approach to the liquidity provision system.
Here, investors deposit and lock their digital tokens in liquidity pools. Doing that gives borrowers the chance to acquire loans once they lock their tokens as collateral. That way, lenders can be compensated with the borrowers’ collateral in case they fail to pay on time.
Borrowers will also pay an APR ( annual percentage rate) that depends on the token pair. A borrower can use these loans to finance their margin trades. In turn, lenders generate interest rates (supply APR) for distributing their assets to Kashi.
Staking
Staking is yet another feature found on Sushiswap. Ideally, staking refers to the act of locking digital tokens in a smart contract to generate more tokens. The method is similar to keeping money in a bank with fixed deposit rates. In this case, however, investors maximize profits with their digital assets.
Sushiswap borrows the same idea and offers traders a staking option through SushiBar. Investors can receive rewards in the form of xSUSHI once they stake their SUSHI tokens. The rewards come from the exchange’s trading fees with an APY of approximately 11%. Getting onboard SushiBar is straightforward, as users only need to access the staking option on Sushiswap. From there, users indicate the SUSHI amount they would want to lock and approve the trade.
SushiXSwap
SushiXSwap is the exchange’s latest feature launched in July 2022. The new feature acts as a cross-chain DEX that allows users to trade tokens on other networks. That way, traders can access chains like Polygon, Optimism, Fantom, and the Binance Chain.
SushiXSwap is built on the Stargate protocol and plans to ease the movement of assets across different chains. The entire process is made possible with BentoBox, the exchange’s smart contract working as the central vault.
Sushiswap Token Details
SUSHI represents an ERC-20 token with a maximum supply of 250M coins. The token is expected to reach this hard cap by November 2023. At the time of writing, the virtual token is trading at $1.35.
SUSHI token holders can use SUSHI to access two types of assets: SUSHIPOWAH and xSUSHI. For one, staking SUSHI lets traders earn xSUSHI rewards. It, therefore, makes xSUSHI relatively more valuable than SUSHI since xSUSHI generates value from trading fees.
When a trade takes place, liquidity providers get 0.25% of the swap fees. The remaining 0.05% is split amongst every SUSHI holder in the ecosystem. Hence, the exchange initiates the reward contract and converts all LP tokens into SUSHI. Due to the reward mechanism, xSUSHI’s value will correspond with SUSHI’s price movement.
Even so, the value of one xSUSHI will ultimately be higher than one SUSHI token. Through SUSHI, holders can become part of the exchange’s governance system. This fact means that holders can maintain voting rights and make proposals that benefit Sushiswap.
Pros and Cons of Using Sushiswap
The advantages of using Sushiswap include the following:
Users Control their Assets
Sushiswap works on a decentralized ecosystem that lets users maintain their digital tokens. In a traditional setup, banks and other financial institutions are responsible for maintaining a customer’s holdings.
Decentralized exchanges, on the other hand, are designed to eliminate centralized authorities from gaining control. Sushiswap embraces a similar approach as users are in charge of their holdings. Users only need their digital wallets to send, receive, and trade tokens.
Friendly Interface
Sushiswap applies a unique Sushi theme that helps break the intimidating aspects of the crypto industry. Thus, new traders can easily navigate through Sushiswap due to its user-friendly interface.
A Broad Range of Features
In most cases, decentralized exchanges only provide swapping services to users. Nonetheless, Sushiswap has a wide range of services that cater to the needs of different traders. Asides from swapping tokens, Sushiswap has a lending protocol that connects lenders and borrowers in one ecosystem.
Users can distribute their virtual assets and earn interest rates from the protocol. Moreover, borrowers can get collateralized loans from Kashi and use them to trade in the market as financial leverage. Staking is another feature that Sushiswap supports through the SushiBar protocol. Having different services enables users to decide how they would like to interact with the exchange.
Help Articles
New users often have a hard time understanding several crypto-based terms. This fact may create a huge information barrier where novice traders are unaware of where they can start.
Sushiswap’s interface hosts a FAQ section that clarifies various terminologies. For instance, the FAQ section has articles that talk about xSUSHI, BentoBox, governance/voting, and many more. The exchange also has a step-by-step guide that highlights how users can get started with Sushiswap. In the same tutorial section, new users will get insights on how they can connect with other networks like Polygon and Celo.
Solves the Liquidity Problem
Liquidity is an important aspect of any financial system. In the crypto space, liquidity refers to the ease with which a virtual asset can be exchanged for another digital currency or token.
Going by Sushiswap’s introduction tab, the exchange hopes to build a community-based network that addresses liquidity. It gives users the chance to become liquidity providers and earn rewards for supplying the platform with adequate liquidity.
Contributing assets to Sushiswap’s pools makes the exchange stable as buyers and sellers can access the digital tokens they desire.
No KYC Requirements
Know Your Customer (KYC) strategies are standard requirements by platforms that help identify users and maintain transparency. Nonetheless, while the process helps curb illegal financial practices, it exposes users to identity theft and impersonation incidents. Being a decentralized exchange, Sushiswap removes the idea of submitting sensitive documents that could compromise a user. That way, users will not be subjected to go through identity verification processes.
Disadvantages
Even with attractive features, there are a few factors that may negatively affect the exchange. For one, Sushiswap’s origin was based on a ‘vampire attack’ which basically siphoned off Uniswap users. The DEX did this act by developing SUSHI and supplying it to users who left Uniswap.
What’s more, the unknown Sushiswap creator allegedly took part in an exit scam in September 2020. At the time, the anonymous developer withdrew more than 2M SUSHI and exchanged it for 18,000 ETH. Such controversies damage Sushiswap’s image in the long run and make it questionable to the general public.
Wrapping Up
Despite the past turmoil, Sushiswap offers users genuine trading services in a decentralized manner. It lets users earn rewards from staking and distributing their digital assets to liquidity pools. Traders can also swap digital tokens on more than ten blockchain networks using SushiXSwap. Such scaling strategies break various trading barriers since users can trade on other external chains.
Through DeFi projects like Sushiswap, individuals can easily interact with traders and digital tokens without any central authority. While this fact may address the issue of financial inclusion, investors need to research and remain aware of the associated risks.