Yield farming protocols such as SushiSwap are taking the decentralized finance world by storm.
In short, yield farming refers to the lending of cryptocurrencies via decentralized exchange (DEX) liquidity protocols. In return for providing liquidity, farmers receive rewards that can reach over 100% APY on some coins. Needless to say, this would put any standard financial institution to shame.
However, with higher rewards come higher risks, and that is very much the case with yield farming. Protocol hacks, market manipulation, and regulations, are all significant risks associated with yield farming.
Nevertheless, yield farming is witnessing rapid exponential growth. So much so, in the space of 1 year, the total value of money locked away in smart contracts rose from $831 Million to $25 Billion.
The history of SushiSwap?
Despite, the lack of knowledge about the development team and the fact the protocol was not audited at the time of release, investors rushed to the project.
Upon release, SushiSwap achieved near-instant success. Within just 3 days, the TVL in smart contracts hit $150 Million. This was quickly followed by multiple exchange listings and the long-awaited Quantstamp audit. As a result, over the next week, the TVL rose to over $1 Billion. This resulted in farmers receiving interest rates on locked funds exceeding 2,500% APY.
Despite the protocol’s astonishing start, things quickly turned sour.
On September 5th, a mere 10 days after the SushiSwap launch, the anonymous developer, known as Chef Nomi, liquidated over $14 Million of Sushi tokens. Chef Nomi maintained that he did so in order to focus on the development of the protocol.
As you can imagine, this caused outrage within the cryptocurrency community. The ensuing fallout resulting in the Sushi token price dropping by over 50%.
Chef Nomi then walked away from the project and handed the reigns over to Sam Bankman-Fred, the founder of FTX derivatives exchange.
In response to the unfolding drama, the SushiSwap community selected 9 key individuals from within the DeFi space to be responsible for holding SushiSwap’s development funds.
The crypto community reacted well to this announcement and on September 9th, SushiSwap became the world’s largest decentralized exchange when over $1.14 Billion was migrated over from Uniswap.
Hot on the heels of a successful migration, Chef Nomi returned to the scene.
Chef Nomi swiftly returned $14 Million worth of Ethereum back to the treasury.
However, that didn’t wash with investors who noted that he sold on the day Binance launched Isolated Margin treading on SUSHI. This opens the possibility of Chef Nomi shorting Sushi token before removing his liquidity.
Regardless, Chef Nomi is no longer involved in the SushiSwap protocol.
What is SushiSwap?
SushiSwap exchange is a fork of Uniswap, the world’s most popular DEX protocol. Therefore, it runs on the Ethereum blockchain and has almost identical features.
However, the protocol launched with one major addition. In what is known in the industry as a vampire attack, SushiSwap introduced the SUSHI governance token to incentivized liquidity providers away from Uniswap.
This strategy proved very appealing and in the search for greater rewards, yield farmers migrated on mass to SushiSwap. This resulted in $1.3 Billion of liquidity getting sucked from the Uniswap liquidity pool.
SUSHI Governance Token
The SushiSwap team is currently developing a decentralized governance framework to hand control of the protocol to the community. Central to this framework is the SUSHI governance token that will give holders the power to influence decisions and shape the future of the protocol.
SUSHI token is specifically designed to reward early adaptors to the protocol. Therefore, early adaptors receive 10x the rewards of those who join the protocol at a later stage.
The SushiSwap Exchange lets users swap ERC-20 tokens through its automated liquidity pool for a 0.3% trade fee. This is in addition to GAS fees which are necessary to confirm transactions on the Ethereum blockchain.
0.25% of the SushiSwap fee goes towards rewarding liquidity providers, with the additional 0.05% going towards rewarding the SUSHI holders pool.
How to use SushiSwap?
Once connected, you can check out the SushiSwap menu. Here you will find an extensive range of token pairings and pools to choose from.
After deciding on your preferred coin pairings, you can enter the number of tokens you wish to deposit and click the ‘Approve X’ button to confirm the transaction.
The SushiSwap works in the same way as Uniswap. Therefore, you can earn a share of the protocol’s swap fees by providing liquidity to the exchange pools.
To do this, you will need to deposit an equal amount of each coin in the desired pairing. Then head over to the exchange pools and click on add liquidity.
Yield Farming Menu
The SushiSwap menu contains a large selection of yield farming pools pegged to the SUSHI token. This means farmers earn SUSHI rewards for providing liquidity to the pools.
The yield varies depending on the coin added. However, APY’s are extremely favorable with the SUSHI-ETH pool providing returns of over 105% APY.
Here you can choose to stake your SUSI tokens to earn rewards. Again rates are extremely favorable with 0.05% of all swap fees generated on the protocol going towards rewarding participants in the SushiBar pools.
Rewards are distributed once a day when all the LP tokens are sold for Sushi tokens and distributed proportionately amongst the pool participants.
Is SushiSwap safe?
Given the backlash the protocol faced at the hands of Chef Nomi fiasco, it’s little surprise that many users are skeptical when it comes to using SushiSwap.
That said, as a direct result of Chef Nomi’s actions, the team set out to strengthen the security of the protocol to make sure it doesn’t happen again.
Therefore, all major admin calls are subject to a 48-hour delay. This means that liquidity providers receive prior warnings of any suspicious behaviors. And can remove their funds from the pools long before any such behaviors occur.
Given its checkered past, it is quite staggering the amount of success the protocol continues to generate. However, the events of August 2020 are still fresh in the minds of the cryptocurrency community.
The being said, the protocol is very much under new and improved management. Who, in a short period of time addressed the community security concerns and transformed the project by combining liquidity with some of the highest-earning yields in the DeFi space.
All in all, it is still early days for the protocol and it will need to keep innovating to stay relevant. Nevertheless, if early demand for the protocol is anything to go by, the future looks bright for SushiSwap.