Automatic token exchange Uniswap has been one of the success stories of the Ethereum DeFi sector.
Initially created by one coder Hayden Adams (albeit with a lot of help from the community), Uniswap has become one of the key foundational layers to the entire $18 billion DeFi token ecosystem.
Using it, anyone can set up trading options for any Ethereum token that supports its basic ERC20 standards. Similarly, anyone with tokens to spare can lock them into Uniswap’s liquidity pools (LPs), gaining a proportional share of the 0.3% of trading fees generated by each trade.
The dapp has been a massive success, especially following the launch of version 2 in May 2020, which added some neat features making the provision of liquidity even easier.
Since then, its daily activity has popped from hundreds of wallets to tens of thousands.
But dapps can always be improved and that’s what a pseudo-anonymous group has done, taking Uniswap and building SushiSwap, their own dapp on top.
Cleverly, anyone who’s already part of a Uniswap liquidity pool (LP) can just take the LP tokens they get from Uniswap when they initially lock in their tokens and stake them into SushiSwap’s smart contracts.
For doing so, they’re being rewarded with the new SUSHI token that is being created and distributed to SushiSwap’s stakers with every new Ethereum block.
Interestingly, anyone just holding SUSHI tokens also gets 0.05% of the trading fees, while 0.025% goes to those who have staked their Uniswap LP tokens, as well as the new SUSHI tokens they get.
So far, so Degen DeFi, you might be thinking, yet there are some aspects of SushiSwap that are really worrying people.
Of course, it goes without saying that none of its code has been audited so there’s been no external check for bugs or the potential for exploits. Despite that over $1 billion has been locked into its smart contracts; apparently that’s over 70% of Uniswap’s total TVL.
A particular worry is SushiSwap wants to get users to pull their liquidity from Uniswap entirely for the additional rewards and features they plan to launch in the future.
Also, it’s remarkable how quickly this new project has gained scale, claiming the vast majority of Uniswap LPs for the token pairs SushiSwap supports have staked their tokens.
This suggests a high level of coordination from a very small number of crypto whales (whether individuals or companies) working closely together.
Certainly, Hayden Adams has pointed this out on Twitter, while other DeFi founders have highlighted the damage such a parasitic – and eventually vampiric – approach would have on overall DeFi ecosystem liquidity.
Similarly, as with other high performing DeFi tokens such as YFI, SUSHI has quickly been added to various centralized exchanges, which have access to large amounts of liquidity but – arguably – less sophisticated investors.
Hence, the fear is that as quicker, meme-driven projects such as SushiSwap launch to initial success, the more inflated the overall DeFi speculative bubble becomes, the more greedy investors get involved, and the more violent the impact when the bubble eventually goes pop.
As ever, all dapps are experimental and the current generation is extremely so. Never use more value that you’re happy losing.
As always we will continue to monitor developments. Make sure you bookmark the new DappRadar DeFi page and sign up to our newsletter below to get updates direct to your inbox.
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