Ingredients for $SUSHI: A Fundamental Analysis
This fundamental analysis is one part of a paid newsletter from Crypto Consulting Institute. For more information visit: https://www.cryptoconsultinginstitute.com/newsletter
Sushiswap ($SUSHI)
Sushi is a community-governed decentralised application (Dapp) that offers a wide range of decentralised finance (DeFi) products.
The minimum viable product (MVP) is Sushiswap, a decentralised exchange (DEX), first deployed on the Ethereum mainnet and now available on twelve different Ethereum virtual machine (EVM) compatible layer 1 and 2 blockchains. Sushi was the first protocol in the space to incentivise users to migrate from Uniswap through liquidity mining incentives.
Forked from Uniswap V2, users swap assets into liquidity pools (LP) that are algorithmically balanced by what is known as an automated market maker (AMM). The majority of AMMs are moderated by the constant product formula where x is asset one, y is asset two pegged together at a 1 to 1 ratio of market value to produce a constant k. Constant product formula x*y = k. E.g. An initial $200 LP position will consist of $100 of $SUSHI on one side and $100 of $ETH on the other, the quantity and value of the overall position (k) are contingent on price movements on both assets.
Since deploying an MVP, Sushi has deployed a derivative product available when staking in their Sushibar called $xSUSHI. 0.05% of every trade through Sushiswap is collected to purchase $SUSHI from liquidity. Proceeds are distributed proportionally back to $xSUSHI holders, thus always keeping the price greater than $SUSHI. Trading volume directly impacts the value of $xSUSHI based on the accumulated fees.
Onsen is a liquidity provision ecosystem that incentivises newly launched tokens to bootstrap liquidity to farm $SUSHI tokens. For new projects, this is optimal as there are no new tokens from liquidity mining to dump on these new markets, which would otherwise cause divergent loss8 for LP suppliers. Onsen also benefits $xSUSHI holders through the higher trading volume that newly launched tokens often attract.
Miso is Sushi’s token launchpad that plays in with the Onsen ecosystem. The objective is to simplify the process for token projects and their communities to attract capital and increase the trading volume within the Sushi ecosystem.
Kashi is a margin trading platform that enables users to create isolated markets to facilitate lending, borrowing, and collateralising synthetic assets. Typically lending market liquidity exists in a pool-based system. The number of options for lending markets is often limited, as one high-risk asset can affect the risk profile of the entire lending protocol. However, Kashi allows users to launch isolated lending markets for any asset without implicating existing lending markets.
BentoBox is still largely under development and has only achieved integration with Kashi at this stage. The final product will be a single asset deposit vault that applies low-risk farming strategies that lend to third party protocols such as Compound and generate profits in the Sushibar. BentoBox creates an artificial balance of tokens based on what the user deposits in the vault. This enables the user to achieve yields in the vault while simultaneously utilising the artificial balance in any previously mentioned DeFi products on the Sushi protocol. This method is gas efficient, which is significant on Ethereum as a deposit into the BentoBox gives you access to yields from other products without repeated instances of being charged gas. A remarkable feature worth mentioning is that users can set limit orders on the DEX and simultaneously have their assets generating yields. Additional yields through fees on flash loans are available without incurring any loss for the staker. Flash loans allow the user to borrow funds that go through a defined sequence of transactions across different liquidity pools and protocols. For example, you could take a 5ETH loan to buy a token at a lower price on one DEX to sell it for a higher price on another. Arbitrageurs keep the difference after repaying the loan and fee at the end of the transaction sequence. In essence, this enables users to pursue arbitrage opportunities with more significant capital than would otherwise be available to them.
Value proposition
Vampire attack — Taking your fish to make it my $SUSHI
Sushi was the first DeFi protocol to pull off what is known as a vampire attack.
This involves offering attractive liquidity mining rewards to incentivise LP providers to migrate liquidity from one platform to another.
Sushi first captured the attention of communities from various DeFi projects that were chasing higher yields on their staked assets (YFI-ETH, SNX-ETH, LINK-ETH, etc). Initially, stakers received a share of 1000 $SUSHI per block, around 200–1000% APY. In less than one week after launch, Sushi managed to capture $1 billion of Uniswap liquidity.
A Masterchef contract was then deployed for users to effortlessly syphon liquidity from Uniswap to Sushiswap in one transaction. This migration was required for users to continue to receive SUSHI rewards. $SUSHI maintained value as the incentive for staking the token came with a share of all transactions performed through the Sushiswap DEX. Since then, yields have been attainable through products not available from staking in Uniswap LPs.
History
First step when making Sushi, you need to rinse the rice.
It is important to understand the colourful history behind Sushi to understand this community’s journey.
Sushiswap forked Uniswap V2 open-source code on the 28th of August 2020 during the DeFi summer. What this means is Sushiswap LPs operate on the same code as Uniswap. The project had initially launched unaudited and later down the track completed several audits that revealed no known critical errors in the code.
On top of this, Sushi deployed liquidity mining contracts whereby users that staked their Uniswap LP tokens into the contract would receive a share of the $SUSHI token.
Shortly after that, $SUSHI was listed on Binance, which saw the price rise from $1.16 to $8.84 in one day.
Everything was going well until the market correction in September 2020. There is no pre-mine or team allocation of the Sushi token. However, there was a development fund that projects often set aside to fund the future development of the protocol. Chef Nomi, the anonymous founder of Sushi, unilaterally removed one-quarter of the dev fund reserves and cashed out of the market for a total of $14M worth of $ETH. This move destroyed trust in the project, and Chef Nomi received significant backlash from the community. During the fallout, an unexpected saviour had emerged.
Sam Bankman-Fried (SBF) had previously submitted a proposal to share liquidity from Sushi with his flagship Serum DEX. Trusted by the community, Chef Nomi had reached out to SBF and transferred ownership of the admin keys for Sushi. SBF handled the migration to syphon additional liquidity from Uniswap, incentivised by higher $SUSHI rewards in a bid to retain users. SBFs relinquished his admin rights into a multi-signatory contract that requires 6 out of 9 signatures to utilise the developer fund. Operations multi-sig were given to 7 trusted, anonymous contributors to the Sushi ecosystem. 3 of 7 signatures are required to enact a proposal approved in the DAO9 (Decentralized Autonomous Organisation). In essence, SBF did not stand to benefit directly from saving Sushi but did it anyway.
Surprisingly, Chef Nomi returned the $14M of Ethereum to the dev fund. This gesture went a long way to restore trust from the community. SBF most aptly summed it up to Decrypt, “We won’t forget what he did, but we also won’t forget that in the end, he made the right choice”.
Team
Sushi Chefs busy in the kitchen
The above image identifies doxed trustees (publicly known figures) that authorise the use of operational developer funds. The development team themselves are anonymous and consist of over 20 core developers, each responsible for managing different products within the ecosystem.
@0xMaki (Twitter handle) is most notable as the co-founder of Sushi that worked alongside Chef Nomi, who is no longer involved in Sushi. Maki announced on 18th September that he has stepped down from day-to-day operations to take on an advisory and treasury management role, should the community elect to have Maki retain that position.
While there is comfort from an investor perspective to have all contributors doxed, Sushi keeps in the spirit of decentralisation by taking the community’s will and developing approved proposals. Contributors are known pseudonymously through their Twitter profiles, given their relative anonymity, it is difficult to verify their credentials.
Community Engagement
Lining up for a $SUSHI roll
Lunarcrush rates Sushi at 47th on both the AltRank and Galaxy Score, indicating below-average levels of community engagement and posts across public forums. In this instance, Lunarcrush is not a holistic metric as it fails to consider the various Sushi products actively discussed on public forums as it tends to follow Sushi tags.
Sushi does not operate on Telegram. Instead, they favour Discord with over 48,000+ users on the server, which is a significant community presence. There are pros and cons to Discord. Most investors tend to favour Telegram channels to find information on a project, but Discord offers greater functionality and organisation of information. However, it is comparably less user-friendly than Telegram. Nevertheless, operating from Discord does increase the viability of managing a DAO to discuss individual proposals in dedicated channels before taking them to a vote. Regardless, the mood inside the Sushi discord channels is entirely positive, with a lot of excitement towards upcoming developments.
Sushi’s Twitter has over 140,000 followers, which is not a small sum within the scale of DeFi projects. The team are actively posting updates through their personal Twitter accounts that the main Sushi Twitter regularly retweets. Regardless, there is no doubt that Sushi has a significant following. In terms of keeping up with upcoming developments, it is essential to be across Sushi Twitter, proposal forum and Medium pages.
Tracking down information on upcoming developments is not a particularly simple task for new investors. There is room for improvement for increasing the visibility and depth of information repositories. Fortunately, the Discord community is amiable and helpful toward those seeking out more information.
Surprisingly, FutureFund acquired the Sushi.com domain and gifted it to Sushi. This was not only excellent timing with the release of Sushi’s 2021 roadmap, but as the fund name implies, they seem to believe Sushi is worth investing in for the long term to gift a domain name that is considered hot digital property rumoured to cost between $600k — $1.5M to secure.
This recent DAO proposal most clearly illustrates the strength of this community.
LevX proposed he not receive remuneration for spending the next year rolling out Shoyu. It appears the community will not take ‘yes’ for an answer.
$SUSHI Tokenomics and Emission Schedule
Is there enough $SUSHI to go around?
- 250 million $SUSHI hard cap.
- 10% of all emissions go to a Multisig-controlled treasury/dev fund.
- The expected date to reach the hard cap is November 2023.
- There are currently less than 20 $SUSHI tokens minted per block (chart above)
- 0.05% of the exchange trade fees are awarded to holders of the xSUSHI token
Extracted directly from SUSHI Docs. https://docs.sushi.com/the-basics
$SUSHI per block refers to the number of rewards available for liquidity mining with each block confirmation on a blockchain. Each blockchain varies in the time it takes to verify a block, Binance Smart Chain takes approximately 3 seconds and Ethereum takes on average 13 seconds. Currently, around 13.913 are proportionally distributed to liquidity miners across multiple blockchains.
At the time of writing, $SUSHI is currently worth $10.83 per token with a market cap of slightly over $2B. Their all time high was $23.38 on March 23rd 2021.
Sushiswap is the third-largest AMM by total value locked (TVL) on Ethereum.
Sushiswap daily trading volume steadily grew from 250M at the end of 2020 to over 500M in 2021, some days going over $1B. TVL was $1B at the end of 2020 and reached a high of 5.5B in early 2021. Currently, TVL sits at around $4.5B.
Future Developments
$SUSHI are on a roll
There are several key areas of focus for the development of Sushi.
First, there is a focus to expand existing products onto multiple blockchains. As it stands, products are first deployed on Ethereum before they are made available on alternative blockchains. Only the DEX function, Sushiswap, is available on all blockchains. For example, Sushibar is only available on Ethereum, meaning that $xSUSHI is unavailable on alternative blockchains. Further, staking assets in the BentoBox while setting open limit orders is currently only operational on Polygon.
Second, the protocol is deploying on EVM compatible blockchains at a rapid rate. The rationale behind this move is to capture trade volume to bring benefits back to $SUSHI holders. Further, Sushi is seeking to link up with non-EVM blockchains like Solana through the Wormhole bridge. However, given the differences between Solidity (commonly used on EVM blockchains) and Rust (the primary language of Solana), there have been difficulties in implementation. Although, there is the will to solve this problem to utilise more liquidity through SBF’s flagship Serum DEX.
Third, Sushi has its sights on enabling cross-chain liquidity aggregation, enabling users to perform swaps and pursue yield farming opportunities between different blockchains. They seek to aggregate cross-chain to capitalise on the opportunities that come from applying solutions to fragmented liquidity. Given the inherent asymmetrical trade volume on each blockchain arbitrage opportunities are never-ending.
The above objectives are not unique to Sushi. However, the following two upcoming developments are certainly ambitious by AMM standards.
Trident is an upcoming update to the AMM system built on top of the BentoBox application to manufacture custom liquidity pools. The implications of these developments on a unified platform cannot be understated.
- Users will be able to deposit in standard constant product pools. (Uniswap V2 model)
- Supply liquidity to pools with adjusted weighted pools. (Curve and Balancer finance model)
- Swap assets horizontally from the one LP containing up to 32 assets. Rather than routing through multiple pools reduces price impact. (Thorchain model)
- Concentrated LPs that change weight with price movements specified by the user. (Uniswap V3 model)
As Trident further develops, centralised exchanges (CEX) will be able to source liquidity from whitelisted10 liquidity pools. Enabling CEXs to access whitelisted LPs. In addition, Sushi will be seeking to deploy their own price oracles through what is known as a storage-proof time-weighted average price (TWAP) to track prices across LPs.
Shoyu is an upcoming NFT platform spearheaded by one of the core Sushi contributors, LevX. The front end embodies an abstract Japanese style aesthetic while the back end enables high-resolution NFT minting supporting various formats. NFTs can be divided into fractions and sold in pieces with custom royalty redistribution. In the early stages of this release, they will operate on Polygon and Ethereum, eventually expanding to alternate chains. A 3D Metaverse will display NFTs throughout a virtual gallery. The later stages of this development scheduled for the beginning of next year will enable the NFTs to be staked in BentoBox to generate yields. Further, these NFTs will be programmable, which has significant implications in customising features that could potentially have application across metaverses.
Discussion
Maki or Uramaki?
While considering the future, it is unavoidable that we factor in the outcome of events that led to what Sushi has become today. Sushi has been an invaluable experiment for the DeFi space that continues to deliver innovations through enacting the community’s will through DAO governance. Sushi vigorously pursues market share cross-chain and brings together competitor products into a unified ecosystem. Their developments remain ambitious while staying true to their ‘Vampire Attack’ model through continued innovation of existing DeFi and NFT products. However, emulating existing products presents challenges, specifically capturing total value locked (TVL) in the Sushi ecosystem in the face of an increasingly saturated market.
The journey for Sushi has not been free of complications. Co-founder @0xMaki playfully compared his Sushi journey to that of ‘The Social Network’ in reference to the fallouts, highs and lows of Zuckerberg’s getting Facebook off the ground. While none deny that Chef Nomi breached the community’s trust and significantly impacted confidence for future investors, this too was an “experiment in human greed”, as 0xMaki puts it. All that withstanding, such an event bolstered resilience in the Sushi ecosystem for three reasons.
First, from the perspective of those witnessing these events unfold, it took many by surprise to see Chef Nomi return $14M of ETH to the dev fund. Apart from community abuse directed toward his anonymous profile, there was no danger in retaining the funds. He appears to have returned the funds out of repentance. The gesture went a long way to restoring confidence and stemmed the bleeding.
Second, the problem of giving one person unilateral access to the funds prompted preventative measures by transitioning to a multi-signatory contract. It isn’t easy to ascertain whether such a transition would have occurred organically. Still, SBF recognised the merit in such a move to restore confidence in the project’s integrity.
The third reason is that the Chef Nomi incident was a valuable stress test for the protocol and community. Exit scams or ‘rug-pull’ events test the conviction of both investors and contributors. When project’s encounter this fork in the road, they either die or survive. Those that got spooked or no longer felt aligned with the vision left, those that stuck through the hard times, remained. Sustained TVL anecdotally suggests that contributors and the community are committed to ongoing development.
An anonymous team of contributors enact the community’s will through DAO governance that presents an opportunity for broader adoption and regulatory insulation. Michael Saylor is a well-known Bitcoin maximalist that is worth a brief mention. Recently, he divulged a thought-provoking perspective in response to a discussion with Raoul Pal around the future regulation of the crypto industry. His belief that Bitcoin is the fundamental monetary layer and admiration for Lightning Network as a secondary application layer is no surprise. But, his idea of a third layer involving centralised entities utilising a decentralised monetary and application layer in their products such as Paypal is not farfetched.
Why is this perspective on regulation relevant to Sushi? At an operational level, Sushi rates highly for decentralisation. There is no central office. The team are anonymous and receive no tokens other than what the community approves for remuneration. Decisions are not made unilaterally by the team. They can post proposals but still require the community’s approval. Multi-sig holders are publicly known and responsible only for releasing development funds in response to the DAO. They receive no known remuneration for their caretaker duties. As such, there is no centralised accountability. Opening up the possibility of Sushi being a decentralised product that centralised entities, like CEXs, can utilise should the DAO approve. Franchised pools rolling out in later stages of Trident deployment will enable CEXs to access Sushi LPs.
Sushi’s objectives for the foreseeable future appear centred around capturing as much trade volume as possible. For both CEXs and DEXs alike, asset prices are often irrelevant as the goal is to obtain fees through trading volume. The former benefits a select few, the latter benefits all LP suppliers and $xSUSHI holders. SBF also has his eye on tapping into liquidity from Sushi for his flagship Serum DEX that ultimately plays into his grander vision for FTX, which continues to climb the ranks in CEX trade volumes. While SBF is indeed considered altruistic for rescuing Sushi, there is undeniably a mutual benefit to increase trade volume within these ecosystems by leveraging off one another. The challenge in executing this proposition is the ongoing technical difficulties in aggregating EVM LPs with non-EVM LPs such as Serum DEX on the Solana blockchain.
One of Sushi’s greatest successes in being the first to implement the vampire-attack model also presents challenges in capturing market share, even while having a notable presence across multiple chains. There is a two-fold rationale for open-source code. Developers are not required to reinvent the wheel and can freely add or improve upon the existing code. Sushi forked Uniswap and built liquidity mining capabilities into their protocol. This success caught on for Binance Smart Chain (BSC) and has implications for Sushi’s ongoing syphoning of market share. Pancakeswap (PCS) is also a fork of Uniswap with their initial front-end clearly inspired by Sushiswap. PCS has the highest DEX TVL on BSC by a 3x margin to its nearest competitors.
BSC is a prime example of market saturation leading to fragmented liquidity. When BSC TVL was on an uptrend, a new PCS fork emerged daily (sounds inspired, right?). In the beginning, this was highly lucrative for yield farmers or those often referred to as ‘degens’ attracted by obscene annualised percentage rate (APR) returns. However, the vast majority of forks ended in a ‘pump and dump’ where the price of the protocol token never recovered. For Sushi to syphon liquidity away from PCS, they would need to incentivise LP migration beyond what is available within the parameters of their emission schedule. In other words, Sushi would need to match PCS in APR until additional products are available to attract new liquidity outside of their ecosystem. The same story goes for alternate blockchains where Sushi has asserted its presence. Until features become available that are otherwise not available from competitors on a particular blockchain, existing Sushi LP providers will likely chase higher APR rather than incentivise new liquidity into the platform.
Sushi seeks to expand its vampire-attack model to syphon liquidity from the NFT space to their Shoyu platform. Similar challenges exist in this endeavour, as listed above. New NFT marketplaces appear to emerge daily, further fragmenting liquidity and trading volume. NFT markets are often illiquid, which is no surprise given the exorbitant price tags.
Product differentiation is key to capturing liquidity that exists elsewhere. The trend towards NFTs seems to be pivoting away from simple collectibles toward more complex offerings. Once Shoyu is fully deployed, programmable NFTs will enable fractionalized ownership (E.g. multiple people having shared ownership of the same NFT) and other functions. Further, BentoBox may utilise NFTs to accrue yield. This is not a unique concept, but what is fascinating about Shoyu is their focus on multi-format NFTs such as high-resolution images, augmented reality and 3D images.
To top it off, Shoyu is the first truly decentralised NFT marketplace. But why is that important?
Opensea conceded that their head of product was purchasing NFTs that he knew would be listed on the front page of the site. Not only is that a blow to investor confidence but has caught the attention of the SEC by raising the question of whether NFTs are securities. Opensea charges trading fees that go into the coffers of the company, the use of trading fees on Shoyu will be decided by the $SUSHI community.
LevX is trying to turn down receiving payment for his contributions to Shoyu but the will of the DAO will not allow it. A lesser community would have taken him up on thinking only of their bottom line. DAOs work best with an engaged community that have developed a collective conscience and sense of duty to make ethical decisions.
The real game-changer for Sushi will be the full deployment of BentoBox, cross-chain LP aggregation across all blockchains they assert their presence on, and Trident custom AMM configurations. As mentioned, without higher APRs, it is unlikely Sushi will syphon liquidity until new liquidity enters their ecosystem to utilise their unique offerings. Typically assets deposited into a vault are unable to be employed beyond obtaining yield. In this model, a user could have an open limit order with a staked asset that remains in BentoBox until the limit order is filled. This feature will undoubtedly attract those who wish to set buy limit orders in the lower range to catch sudden drops in the market. Should these orders fail to fill, the user will continue to obtain yield.
The quest to achieve cross-chain liquidity aggregation is a contemporary DeFi narrative. Fragmented liquidity is a known issue in DeFi, particularly for blockchain agnostic assets like $SUSHI. There are opportunities to apply lucrative yield aggregator strategies through cross-chain arbitrage. There will always be higher trade volume on one blockchain at any given point in time than another. Price discrepancies across these LPs are unavoidable. With Sushi’s multichain deployment, these opportunities are likely to be taken advantage of in the future through a viable cross-chain yield aggregator.
Staying true to the vampire-attack model, Sushi is expanding its LP configurations to keep up with Uniswap and the like. For example, Curve captures liquidity by implementing a dynamic peg that differs in principle from the standard constant product maker. The effects of price movements in this model are greatly mitigated in the overall LP position. Users seeking to manage their divergent loss risk will likely migrate their liquidity to a unified protocol with multiple configurations rather than tolerate the limitations of existing LP provisions.
To conclude, Sushi’s checkered history has deterred investors in the past. Fundamentals often lagging behind price is a common trope that rings true, even more so following adverse events. Once trust is lost, it isn’t easy to restore, and undoubtedly this will take time. But looking closely at Sushi’s development, persistent TVL, relatively low market cap compared to similar competitors, dedicated community and contributors, and their plans for innovation, it can be well-argued that $SUSHI is undervalued. While it may struggle to disrupt the network effect of the darling DEXs to gain dominance on each blockchain respectively, if Sushi can continue to deliver on its developments without any major setbacks, it is difficult to deny the potential upside of taking part in this protocol.
This fundamental analysis is a sneak preview of an up and coming newsletter from Crypto Consulting Institute. For more information visit: https://www.cryptoconsultinginstitute.com/newsletter
