What Is SushiSwap? The DEX Explained

SushiSwap is a decentralized exchange (DEX) that operates on the Ethereum (ETH) blockchain. It allows users to trade cryptocurrencies without the need for a central authority. This platform is part of the broader decentralized finance (DeFi) movement, which aims to recreate traditional financial systems with fewer intermediaries.

It originated as a fork of Uniswap but has introduced additional features and incentives. Its native token, SUSHI, gives holders governance rights and a portion of the transaction fees generated by the platform.

In this article, we dive into the mechanics of SushiSwap, including how the DEX started, its features and comparison with Uniswap.

Key takeaways

• SushiSwap is a DEX built on Ethereum, offering token swaps, staking, yield farming, and lending. 
  
• SushiSwap allows users to provide liquidity by depositing token pairs into pools. In return, they earn trading fees and SUSHI tokens. 
  
• SushiSwap’s ecosystem includes features like BentoBox (a token vault), where users can earn free yield.
  
• The protocol plans to expand its DEX offerings with projects like Blade AMM and native DEXs for specific blockchain ecosystems.

What is SushiSwap?

SushiSwap was introduced in August 2020 by the pseudonymous creator Chef Nomi. SushiSwap began as a derivative of Uniswap, another leading DEX, but quickly distinguished itself by offering its native token, SUSHI.  

The core mechanism behind SushiSwap is an automated market maker (AMM) model. This system does away with traditional order books and allows users to trade against liquidity pools. Participants can add their tokens to these pools, and in return, they earn trading fees and SUSHI tokens as incentives.

SushiSwap has broadened its scope beyond mere token exchanges. It now supports a variety of DeFi activities, including yield farming, staking, and lending. This expansion is part of SushiSwap’s strategy to build a comprehensive DeFi ecosystem.

Governance on SushiSwap is decentralized; SUSHI token holders can propose and vote on upgrades and changes to the protocol. The protocol experienced some early controversies, particularly involving its founder.

This happened when Chef Nomi withdrew $14million of developer funds on 5 September 2020, which almost killed the project. However, the founder then took to X to apologize and shared details of the transaction where he returned the $14m worth of ETH.

Despite the initial trouble with the founder, the protocol has introduced several features. Let us understand how the protocol works.

How SushiSwap works

SushiSwap operates across multiple blockchain networks. It uses a cross-chain swap feature, SushiXSwap v2, to support trading on several blockchain networks, including. Here’s a list of blockchain networks that it supports:

• Ethereum
• Arbitrum
• Optimism
• Polygon
• Base
• BNB Chain
• Avalanche
• Scroll
• Linea
• Fantom
• Moonbeam
• Celo

Additionally, SushiSwap’s V3 liquidity pools are available on:

• Arbitrum
• Avalanche
• BNB Chain
• Ethereum
• Optimism
• Polygon

The main functionality of the DEX lies in its liquidity pools and the AMM system:

Liquidity pools: Liquidity providers (LPs) deposit pairs of tokens into smart contracts to create pools that allow trading. LPs earn a portion of the trading fees generated from the transactions within these pools.

Automated market maker: This algorithm determines the price of tokens in each pool based on their supply and demand. It facilitates trading that doesn’t rely on traditional order books.

SUSHI token: SUSHI provides various benefits to its holders, such as a share of trading fees and governance rights.

Trading mechanism: Users can swap tokens by connecting a supporting cryptocurrency wallet to the SushiSwap interface. 

Liquidity provision: Anyone can contribute to liquidity by depositing equal values of two tokens into a designated pool. They will receive SushiSwap Liquidity Provider (SLP) tokens in return. These tokens represent their share of the pool and can be used to participate in further yield-generating activities within the platform.

Staking and yield farming: SUSHI holders have the opportunity to stake their tokens in the SushiBar to receive xSUSHI. It accrues a portion of the platform’s trading fees. Moreover, SushiSwap allows users to stake their SLP tokens to earn additional SUSHI rewards.  

Differences between SushiSwap and Uniswap

Despite the similar basic functions, SushiSwap and Uniswap are both different in several ways:

Origin and development

• Uniswap: Founded by Hayden Adams in November 2018, Uniswap was the first to introduce the AMM model, allowing direct ERC-20 token trades from user wallets.
• SushiSwap: Launched in August 2020 by the anonymous Chef Nomi, SushiSwap started as a fork of Uniswap, aiming to increase community involvement and introduce new functionalities.

Governance and community involvement

• Uniswap: Relies on a central development team with enhancements influenced by UNI token holder proposals.
• SushiSwap: Features a strong community-driven approach, enabling SUSHI token holders to actively participate in governance decisions, shaping the platform’s future.

Fee structure and distribution

• Uniswap: Uses a tiered fee model (0.05%, 0.3%, 1%) based on the pool, with all trading fees going to liquidity providers.
• SushiSwap: Applies a uniform 0.3% trading fee; 0.25% goes to liquidity providers, while 0.05% is converted to SUSHI tokens and rewarded to stakers.

Incentives and yield farming

• Uniswap: Initially provided liquidity mining incentives but has phased them out, focusing on streamlining token exchanges.
• SushiSwap: Continues to encourage active participation and liquidity provision through SUSHI token rewards, improving yield farming opportunities.

Additional features

• Uniswap: Focuses on improving token liquidity with features like concentrated liquidity pools introduced in V3, improving capital efficiency.
• SushiSwap: Offers a broader range of DeFi services, including higher yields via BentoBox, flash loans, and plug-and-play interest pools.

Additional features of SushiSwap

Apart from token swaps and yield farming, here are some other features of SushiSwap: 

1. SushiBar staking: SushiSwap allows SUSHI token holders to stake their tokens in the SushiBar. By staking, users receive xSUSHI, which entitles them to a share of the platform’s trading fees.
2. BentoBox: This feature acts as a token vault where users can deposit their funds. BentoBox offers yield through various low-risk farming strategies and supports the development of decentralized applications (dApps) on top of the SushiSwap platform.  

Tokenomics of SUSHI token

The SUSHI token is a central part of the SushiSwap ecosystem. Let us understand how the SUSHI tokenomics work.

Total supply and emission rate

• SUSHI has a fixed total supply of 250 million tokens. This cap ensures that no further tokens will be created, stabilizing its supply and potentially enhancing its value over time.

Allocation

• The initial allocation of SUSHI tokens was heavily geared towards rewarding liquidity providers, with approximately 90% distributed through liquidity mining. This strategy was aimed at quickly building a strong liquidity pool. A smaller fraction, around 10%, was reserved for the development team to fund ongoing development and operations.

Utility and usage

• SUSHI token holders have the right to participate in governance decisions, such as proposing and voting on changes to the protocol. 
• Users can stake their SUSHI tokens in the SushiBar to earn xSUSHI, which represents a share in the SushiSwap’s fee earnings. 

Fee structure

• SushiSwap implements a fee of 0.3% per trade, from which 0.25% goes to liquidity providers, rewarding them for their risk and investment in the liquidity pools. The remaining 0.05% is allocated to SUSHI stakers, creating a continuous reward system for token holders.

User interface and experience

Clean layout

• The interface of SushiSwap is clear, which makes navigation across its various features, such as token swapping, liquidity provision, staking, and yield farming, easy.

Wallet integration

• SushiSwap allows direct connectivity with popular wallets like MetaMask, allowing users to manage their assets efficiently and securely directly through the platform.

Cross-chain functionality

• To improve trading flexibility and access to a broad range of assets, SushiSwap supports multiple blockchains, including Ethereum, Polygon, and Binance Smart Chain. All the supported blockchains are mentioned clearly on the homepage.

Accessible core features

• The platform’s core functions are easily accessible, with sections labeled for swapping, pooling, and other financial activities.

Responsive design

• SushiSwap’s interface is responsive, making it fully functional on various devices, including desktops and mobiles.

Liquidity provisioning on SushiSwap

Liquidity provisioning on SushiSwap is an easy process where LPs contribute pairs of tokens to liquidity pools. These pools allow trading and let LPs earn transaction fees and other rewards. Here’s how it works:

Understanding liquidity pools

• Liquidity pools on SushiSwap are smart contracts containing reserves of two different tokens. These pools allow for automated trading via an AMM model.

Becoming a liquidity provider

• Choose a token pair: LPs select two tokens, like ETH and USDC, for which they want to pair and provide liquidity.
• Deposit tokens: Equal value amounts of each token are deposited into the selected liquidity pool.
• Receive SLP tokens: LPs receive SLP tokens that represent their share of the pool.

Types of liquidity pools

• Constant product pools: These pools use the formula x * y = k to maintain a balanced ratio of two assets, ideal for most token pairs.
• Stable pools: Designed for assets of similar types, like stablecoins, these pools minimize trading volatility and slippage.
• Concentrated liquidity pools: These allow LPs to allocate liquidity within specified price ranges.

Risks and considerations

• Impermanent loss: Price changes in the pooled tokens can lead to temporary valuation differences compared to holding tokens outside the pool.
• Smart contract risks: Like all DeFi platforms, potential vulnerabilities in smart contracts pose security risks to your invested capital.

Security measures and audits

SushiSwap implements several security measures to protect user assets and ensure platform integrity:

Smart contract audits

Independent security firms, such as PeckShield and CertiK, have audited SushiSwap’s smart contracts to identify and address potential vulnerabilities.

Multi-signature wallets

The platform uses multi-signature wallets, requiring multiple approvals for transactions, which reduces the risk of unauthorized access.

Bug bounty programs

SushiSwap encourages community members to report security issues through bug bounty programs, promoting proactive identification and resolution of vulnerabilities.

Incident response

After a security breach in April 2023 involving the RouteProcessor2 contract, SushiSwap introduced the FailSafe system. This real-time monitoring tool intercepts and blocks malicious transactions, improving the platform’s security.

Future developments and roadmap

SushiSwap has laid out a series of developments to improve its platform:

Multi-chain expansion

SushiSwap is live on over 35 blockchain networks and plans to expand further. The team plans to extend the availability to 50+ chains.

Aggregation stack

Sushi’s Route Processor powers a highly distributed cross-chain aggregation stack, aggregating liquidity from hundreds of sources. However, they plan to ramp up the aggregation stack to over 1,000 liquidity sources.

SushiXSwap

Looking ahead, SushiSwap plans for Li.Fi integration, introduce Axelar Bridge, Wormhole integration and ZetaChain launch.

Swap API

Sushi’s Swap API, powered by the Route Processor, allows integration of SushiSwap’s swap functionality into partner applications. Future updates will include swap widget configurator.

Blade – No-IL AMM

Sushi is developing Blade, an AMM designed to eliminate impermanent loss (IL) for liquidity providers. This feature promises stable yields on blue-chip assets, addressing one of the most significant challenges in DeFi liquidity provisioning.

Trade on the go

To cater to modern users, SushiSwap is working on mobile-friendly solutions. These features will allow users to trade and manage their portfolios on their mobile devices.

Governance improvements

SushiSwap is developing a governance dashboard to improve transparency and community engagement. This dashboard will showcase budgets, project wallets, and audit results.

Affiliates/referral program

SushiSwap plans to introduce its affiliates and referral programs. The details of the rewards and perks for this program are yet to be announced.

1. 01.

   What is SushiSwap used for?

   

   SushiSwap allows the swapping of various cryptocurrencies through liquidity pools managed by smart contracts. Users can trade tokens, provide liquidity to earn fees, and participate in governance decisions using the platform’s native token, SUSHI.

2. 02.

   How to make money on SushiSwap?

   

   Users can earn income on SushiSwap by:

   • Providing liquidity: By depositing tokens into liquidity pools, users receive a share of the trading fees generated from swaps involving those pools.
     
   • Staking SUSHI tokens: Staking SUSHI in the SushiBar allows users to earn additional SUSHI tokens as rewards.
     
   • Yield farming: Users can stake their liquidity provider tokens in various farms to earn SUSHI rewards.
3. 03.

   Is SushiSwap safe?

   

   SushiSwap has implemented several security measures, including:

   • Regular audits by independent firms to identify and address vulnerabilities.
     
   • Requiring multiple approvals for transactions to improve security through multisig wallets.
     
   • Encouraging the community to report potential security issues through bug bounty programs.