SushiSwap Will Withdraw Up to $830M From Uniswap Today: Why It Matters for DeFi

Uniswap fork SushiSwap has begun migrating $830 million of crypto assets to a new community-owned automated market maker (AMM). The process began at approximately 14:15 UTC, when testing the migration first began.

The event is perhaps the largest test to date of a growing mood in DeFi: that all major projects should be community-owned. As of now, Uniswap is a standout market leader without a governance token, the type of coin that makes decentralized decision-making possible.

Stepping back, some liquidity providers to Uniswap’s AMM system have given control of their crypto to the rival AMM for the purpose of migrating assets to SushiSwap (and earning SUSHI tokens for doing so). The first pool to make the trek will be CRV/ETH (CRV is the governance token for stablecoin exchange Curve).

The move is earlier than expected because the originally stated migration for SushiSwap was supposed to be this Friday. Last week, however, the community voted to move up the migration by five days, to Sunday, Sept. 6.

But then the anonymous leader of SushiSwap exited with his ETH stake, leading to drama in the community. The newly enriched SushiSwap creator turned over control of the project to Sam Bankman-Fried, CEO of both the synthetic exchange FTX and quant trading firm Alameda Research. 

Bankman-Fried tweeted out some migration details on Wednesday morning. The timeline is not completely set in stone because the project’s new leadership plans to run tests as they go.

The decision to run tests appears to be in response to comments in the SushiSwap message board on Tuesday urging caution.

According to Bankman-Fried, there have been testnet runs and there will be final tests after the smart contract unlocks the migration process. Then the pools will migrate one by one. 

While it’s not clear just how long it will take, Bankman-Fried told CoinDesk on Twitter that he and his colleagues will likely move each pool fairly close together.

The SUSHI token is trading today at roughly $3.00, well off from its all-time high of $11.93 on Sept. 1, according to CoinMarketCap.

AMM wars

To be clear, SushiSwap is taking liquidity currently held by Uniswap. This is possible because liquidity on Uniswap is redeemed using liquidity provider (LP) tokens that account for the depositors’ share of the pool (the value of the share grows as people use it and pay 0.3% fees on each trade).

Users have turned their LP tokens over to SushiSwap. The smart contract will then redeem all its pools on Uniswap, migrate the actual underlying crypto assets to SushiSwap and then replace users Uniswap LP tokens with SushiSwap LP tokens. 

According to DeFi Pulse, there is currently $1.47 billion worth of crypto assets staked to Uniswap, but a community-built data portal to SushiSwap claims that 55% of those assets are staked to switch over to SushiSwap today.

Further, Bankman-Fried has promised to distribute 2 million SUSHI tokens to SushiSwap backers who stick around through the migration. 

There are 18 pools of token pairs on SushiSwap, though Bankman-Fried tweeted that the BASED/sUSD pool would not be migrating. By and large, pools are an ERC-20 token paired with ETH, making it easy to swap between any two tokens (with ETH as the bridge). 

Pools include SUSHI/ETH, ETH/USDT, REN/ETH, YFI/ETH, LEND/ETH and many others. 

DeFi context

Both SushiSwap and Uniswap are AMMs, or robots on Ethereum who always have a “buy” price and a “sell” price for any two Ethereum-based tokens for which they have liquidity.

For Uniswap, that’s just about all of them; for SushiSwap, it’s a limited set, but liquidity providers accrue a stake in the platform the longer they provide funds.

SushiSwap is a part of a new crop of decentralized finance (DeFi) projects that belong in the world of Weird DeFi, new forms of companies that are meme-driven and whose goals are an emergent property of their community. 

Inspired by the distribution of Yearn.Finance’s YFI governance token, Weird DeFi favors projects that do so-called “fair distributions.” Fair distribution means there are no tokens set aside for the project’s founders and investors.

The SushiSwap community made an exception for the creators of SushiSwap, however. The pseudonymous creators who forked Uniswap’s open-source code made off with an estimated $13 million in ETH after unloading their SUSHI this weekend.

The founders were good enough to turn over control over what they built to others, however.

Election 2020

An election is taking place for the nine members of a multisig wallet that will be able to make changes to SushiSwap’s code. Community member Zippo made a dashboard to follow the vote. Nine people will be chosen and any six can make changes.

In the leadup to Wednesday’s migration, there had been an active if modest campaign within the Sushi Discord server. Candidates for the multisig discussed their qualifications and affirmed their devotion to abiding by the community’s will, reflecting a growing interest in the emerging narrative around “protocol politicians.”

The vote closed just before 14:10 UTC on Wednesday as the migration testing started. 

Top vote-getters included Bankman-Fried, Compound founder Robert Leshner, 0xMaki (a SushiSwap co-founder who was not allocated tokens) and The Block’s Larry Cermak. 

Cermak did not reply to a request for comment from CoinDesk last night about whether he would accept the position, which could pose conflict-of-interest issues relating to his work as the news publication’s director of research. He previously told CoinDesk he had no direct involvement in SushiSwap.

According to the nomination channel in the SushiSwap Discord server, it appears as though anyone could be nominated, even without the nominee’s approval.

While SUSHI is ostensibly the governance token, votes on the multisig – which amounts to a project’s board of directors – were only open to those who had staked their SUSHI in the SUSHI/ETH pool.

Who wins?

Uniswap had less than $300 million in liquidity before SushiSwap’s liquidity mining scheme gave Ethereum users a reason to dump well over $1 billion more of crypto assets into the market leading AMM. 

Uniswap worked well at $300 million assets and could easily come out the other side of this process with roughly the same amount or even more. 

The open question following the migration will be whether or not Uniswap has really lost anything if the migration ends with roughly the same amount of liquidity, or if the greater depth on SushiSwap actually makes it more attractive for users who want to make a swap.