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Published by Kevin March and Natalia Gadjieva, January 11th, 2021
SushiSwap’s short history has been nothing but dramatic since its fork from UniSwap on August 26th, 2020. With the question of “How do protocol-level changes affect market dynamics,” Floating Point Group Research examined all major protocol events since SUSHI’s listing on Binance and the beginning of the availability of orderbook data. Events are described over time in the following timeline, and we’ve analyzed how the SUSHI market has evolved since that moment.
- Major changes and developments of SushiSwap, the automated market maker, often don’t seem to be correlated to the price or liquidity changes of its markets on Binance.
- SUSHI’s liquidity is poor, and liquidity shown in the orderbook is vastly skewed to the offer side.
- SushiSwap’s recent merge with Yearn has further solidified Yearn’s position as one of the leading DeFi protocols, but questions remain around to which project’s token does value accrue.
Price Action & Slippage
In Figure 1 below, we see the currency pair of SUSHI/USD over time, from CoinMarketCap. The first week after the listing on Binance on August 26th, there was a sharp downturn that matches a familiar pattern of many other DeFi tokens’ exchange listings. Around that same time, UniSwap initiated its own governance token called UNI, and gifted 130,000 UNI to SushiSwap. Although this gift might have increased the price of SUSHI temporarily, the price plateau around $1.40 set back in after a few days on 9/22.
Crucially, this price depression was perceived as a signal in the community that simply forking a major project’s Github and adding a few changes is not a sufficient strategy to get a DeFi project off the ground. But, the true problem at the heart of DeFi, outside its systemic smart contract risk, remains the shocking volatility. The SUSHI dip to $0.55 on October 7th marked a shocking 93.7% from an all-time high and appeared to be unrelated to anything disclosed by or about the project around that time, and no new information has shed any additional light on that since.
The following week, CoinMarketCap listed SUSHI amongst the top 10 most searched cryptocurrencies without apparent effect on SUSHI’s price as the project experienced further price depression later in October. Nor did the subsequent news of infrastructure updates and the introduction of the OUSD pool seem to reverse any trends.
Since November, we’ve witnessed even more meteoric volatility as SUSHI rockets past previous supports to challenge previous highs since listing on Binance, around $2.00. This price rally coincides with the end of UniSwaps reward. The upwards trend seems to be continued by the news of the merge with Yearn, which we will discuss shortly
Liquidity & Slippage
Liquidity remains top of mind for large investors and even medium sized groups in the DeFi space. To explore to what extent liquidity is a limiting factor in DeFi adoption, we plotted with Binance’s SUSHI/USDT orderbook over time with its mid-price and orderbook depths of 100k, 200k, and 300k SUSHI (Figure 2). This plot’s colored area indicates slippage. The greater the distance from the black mid-point line, the greater the slippage.
We can tell that for certain periods, such as the first week of October, available liquidity remains a significant barrier to entry for institutional size, with the average slippage on a 100k SUSHI sell being 4.31 ± 3.04 %. This price dip happened right after SushiSwap’s project leader, 0xMaki, announced the plans for 2021. Furthermore, it is noteworthy that the maximum slippage at 100k SUSHI has been found at 37.4% on December 5th at midnight, as is shown in the figure below.
Clearly, this indicates that investors deploying any notable size in SUSHI (and likely the rest of the DeFi ecosystem) are splitting orders with sophisticated execution mechanisms. Without those systems to access liquidity in careful ways, that amount of slippage is likely an insurmountable deal-breaker for serious investors.
The analysis shows for approximately the past 3 months, there’s been a dearth of buyers relative to the active sellers in the market, applying constant downward pressure on the currency pair.
December first marks a new chapter for the turmoil of SushiSwap, since the platform announcement to merge with Yearn. The merge is the fifth, and largest, for the Yearn. Although Yearn founder, Cronje, seems to indicate that there is lots of overlap between the two protocols, this step leaves many unanswered questions. What will the merge mean for the price of SUSHI and YFI? Will Yearn monopolize what is supposed to be a decentralized system? And how will the two protocols create synergy between the systems? For now, it seems that the decision has benefitted SUSHI, with an increasing volume and price since December first.
DeFi is a roaring maelstrom of volatility crypto, but with significant rewards for the intrepid investor who can bear the risks. Only time will tell how it will mature, but a lot of work remains to be done to provide protocols and infrastructure sustainable for the long-term and palatable for a more general audience.
This is part one of a series FPG Research will be writing on DeFi. There are further questions to be explored relating to the viability of its use cases for an institutional audience. If you have questions you’d like to suggest we explore, please send them to firstname.lastname@example.org