Did SushiSwap Really “Steal” Liquidity from UniSwap?

SushiSwap, which went live on August 28th, has been called a “vampire protocol” by some due to its intention of sucking Uniswap’s liquidity and migrating it to its own ecosystem. In truth, Uniswap only benefited from SushiSwap’s enormous liquidity and riveting drama. Here’s a breakdown of what happened. 

Key Takeaways 

  • The dark purple represents the amount of liquidity in Uniswap pools that were not tapped by SushiSwap. This baseline gradually increased with the launch of $SUSHI, and gained considerable traction with the launch of the $UNI token. 
  • In orange is the amount of liquidity in Uniswap pools that were tapped by Sushi. Users who staked their LP tokens in these pools would receive $SUSHI as an added reward if they migrated over to SushiSwap on September 8th. 
  • In grey is the amount of liquidity that did migrate over from Uniswap to Sushiswap. Most of this liquidity appears to be new money that only entered Uniswap with the promise of SUSHI rewards

August 27th: SushiSwap Launched

SushiSwap forked the code of Uniswap, which was at that point by far the largest decentralized exchange or automated market maker. It introduced the $SUSHI token as a new form of reward for users who staked liquidity tokens into a few specific Uniswap liquidity pools (total liquidity in those pools is in orange). 

This generated over $1B in liquidity in 4 days. Looking at the graph, the steep increase in liquidity in the Sushi tapped Uniswap liquidity pools can be attributed to the launch of $SUSHI. At that point, this liquidity (in orange) is still on Uniswap. 

September 5th: Cofounder Chef Nomi cashed out $14 million 

This event most likely caused the first dip you see in the liquidity staked in Uniswap Pools ‘Tapped’ by Sushi (in orange). The scandal undoubtedly created a lot of uncertainty around the project, which caused some people to remove their tokens from these staked pools. 

September 9th: SushiSwap Migrated over $800M in Liquidity Funds

The plan was always for SushiSwap to migrate over to its own protocol. Users who deposited their liquidity into the Sushi tapped Uniswap liquidity pools, had their LP (liquidity pool) tokens held in a smart contract that would migrate over to SushiSwap. They had three days to decide if they wanted their Uniswap LP tokens to be turned into SushiSwap LP tokens. 

The amount of people who decided to migrate their liquidity over to SushiSwap is represented in grey. The remaining orange represents the amount of liquidity that stayed in Uniswap after the migration. 

Most people chose to migrate over to SushiSwap to keep earning $SUSHI as reward for staking. At the time, Uniswap’s LP reward was the 0.3% fee on all trades divided up between liquidity providers of each pool – which is less appealing than gaining extra $SUSHI, worth around $2 on October 9th. 

September 16th: Uniswap Launched its governance token, $UNI 

To keep up with SushiSwap, Uniswap minted 1 billion coins to be released to the public over the next four years as a reward for staking in Uniswap liquidity pools. On top of attracting massive liquidity, the launch of SUSHI had also framed SushiSwap as more decentralized than Uniswap. 

This clearly boosted the amount of liquidity deposited in Uniswap liquidity pools. Uniswap is currently the largest market maker, with over $2 billion in total value locked. In comparison, SushiSwap currently has $383.1M

What is DeFi? 

DeFi stands for Decentralized Finance, an umbrella term that refers to blockchain-based financial services. The movement is essentially trying to replicate traditional finance services such as savings accounts, credit lending, etc. onto distributed ledgers so as to remove the current need for middlemen. 

Most DeFi applications are being built on Ethereum at the moment. Ethereum is the world’s second largest cryptocurrency platform after Bitcoin. Due to its ability to deploy smart contracts, Ethereum is much more flexible than Bitcoin and lets developers build different types of decentralized applications (Dapps) beyond simple transactions. 

What is Uniswap? 

Uniswap is a decentralized exchange (DEX) built on top of Ethereum. It allows users to swap ERC20 tokens without the need for buyers and sellers to create demand. Uniswap works with a model that involves liquidity providers creating liquidity pools. This system provides a decentralized pricing mechanism that essentially smooths out order book depth.

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