Uniswap vs. Sushiswap: the DeFi War Explained — AAX Academy
Despite the innovative tech and solutions, the crypto community is no stranger to dramas.
In Defi we see similar dynamics.
In this article, we will explore the first DeFi war between Uniswap and Sushiswap, along with the impact on the decentralized finance sector.
Uniswap vs. Sushiswap: Introduction to the First DeFi War
The first DeFi war occurred between the automated market maker (AMM) protocols Uniswap (UNI) and Sushiswap (SUSHI).
Since the launch of Uniswap V2, users of the DeFi solution can easily swap Ethereum-based ERC-20 tokens or earn a passive income by supplying liquidity to one of the protocol’s pools.
Sushiswap is a fork of Uniswap that also functions as an AMM and a DEX while providing yield farming opportunities for DeFi users.
Despite their code being very similar, there are some differences between the two DeFi projects.
While Uniswap offers liquidity providers (LPs) a 0.3% share of trading fees, Sushiswap LPs get 0.25% of the exchange costs, with the remaining 0.05% paid out in native SUSHI tokens.
Sushiswap Launches a Liquidity War Against Uniswap
At the time, Uniswap didn’t have its own token, so getting rewarded in SUSHI sounded like a good strategy to attract liquidity providers from the competitor’s platform.
With more liquidity coming to the platform, Sushiswap could benefit from better trade execution and higher volumes, potentially making the platform the top DEX in the DeFi space.
Along with its token, Sushiswap also introduced yield farming as a model to distribute SUSHI to users. In exchange for the rewards, the DeFi platform could gain liquidity from its main competitor throughout the following process:
- An LP provides liquidity by contributing tokens (e.g., 1 ETH and 1,136 DAI) in a Uniswap pool.
- In exchange for supplying liquidity, the LP receives Uniswap LP-Pool tokens that represent the coins he contributed to the pool, which are mainly used for earning trading fees on the platform.
- The LP then moves the Uniswap pool tokens into a Sushiswap smart contract to stake the coins. In exchange for doing so, the LP receives a specified amount of SUSHI tokens (based on the provided liquidity).
- Soon after, Sushiswap converts the Uniswap pool coins to Sushiswap LP Pool tokens via a smart contract to redeem the cryptocurrencies the LP contributed on Uniswap and deposit them in identical pools on the Sushiswap platform.
- As a result, all the liquidity the LP supplied on Uniswap is transferred to Sushiswap, with the provider receiving 0.25% of the trading fees in the pool (in addition to SUSHI tokens).
The process is similar to creating a new company with very similar products to the market leader firm and convincing as many employees there as possible to move to the fresh business by offering generous bonuses and salary increases.
This strategy does not only help the new business grow but also cripples the other company and decreases its dominance over the market.
And the same has happened with Sushiswap and Uniswap, with the prior starting a full-fledged liquidity war against the latter DeFi protocol.
Since LPs could have earned as much as over 1,000% APY on Sushiswap at the time — mainly due to the protocol’s SUSHI distributing model to yield farmers -, many have initially moved from Uniswap to benefit from the massive potential gains on the competitor platform.
As a result, the total value locked (TVL) in Sushiswap surged from September 5’s $2,700 to $1.428 billion by September 12, boosting the protocol’s market cap by nearly 53 million times during the period.
At the same time, Uniswap’s TVL crashed from $1.821 billion to $617 million, closing the period with a 66% loss in market share.
Uniswap Recovers and Gets Stronger Than Ever
However, despite Sushiswap taking over the DEX market as the leader by siphoning liquidity from its competitor, the tide has quickly changed for the DeFi project.
It started with Sushiswap’s anonymous project head, Chef Nomi, who dumped around $13 million worth of SUSHI tokens from the developer pool he had exclusive access to.
This controversial move caused quite some confusion and received harsh criticism from the community (which later led to Chef Nomi returning the tokens and getting replaced).
With that said, the worst was yet to come for Sushiswap.
In response to the liquidity war’s launch, Uniswap issued its own UNI governance token on September 17, from which the team distributed 400 UNI (worth around $1,200 at the time) in a massive airdrop to everyone who contributed to the project before September 1.
Besides that, the DeFi project started distributing the remaining UNI to yield farmers.
As a result, Uniswap’s TVL has surged from $749 million to $1.965 billion in two days, which further increased to $3.068 billion by November 13.
On the other hand, Sushiswap’s market share entered into a downfall from September 13, crashing from $1.377 billion to $263 million by November 13.
Interestingly, as the DeFi war has ended and a new team has taken over the project, Sushiswap’s TVL has started to climb back up again, with the protocol’s market cap standing at $1.78 billion on January 22.
At the same time, Uniswap has managed to maintain its dominance over the DEX market with a $2.78 billion TVL (January 22).
Original Projects to Win Wars Against Forks
The DeFi war between Uniswap and Sushiswap was not the only one in the industry as there were multiple occasions when forks and original projects have competed with each other in the decentralized finance space, such as:
Interestingly, in each case, the original protocol has managed to regain and retain supremacy.
Interestingly, the same scenario occurred during crypto forks, such as the Bitcoin Cash and the Bitcoin SV chain splits.
While blockchains and open-source apps can be forked, the same can’t be done with communities, reputation, and trust.
In the end, crypto users support those projects the most that have built something unique and innovative to provide value and new use-cases for the industry.
Originally published at https://academy.aaxpro.com on January 22, 2021.