Unpacking DeFi And The Significance Of SushiSwap

On Sept. 9, SushiSwap, a Uniswap fork, completed a transfer of over $1 billion in liquidity from Uniswap. The hostile takeover of Uniswap liquidity is a milestone in digital finance and marks the introduction of a model that could replicate market making, borrowing, lending, and exchanging without institutional middlemen that charge exorbitant fees.

In the following text, Benzinga will describe the heart of the decentralized finance movement and the implications of the recent SushiSwap migration.

Breaking Down DeFi

In a general sense, blockchain alone, as well as bitcoin, lack a utility component. With the introduction of ethereum, a decentralized open-source platform, as well as innovation since, developers have begun to introduce utility-like aspects, such as insurance and data providence, through smart contracts, which are basically coded escrow agreements.

Since the 2017 cryptocurrency bubble that saw Bitcoin peak at nearly $20,000, emerging ethereum projects have allowed market participants to lend, borrow and swap, amongst each other, over decentralized exchanges (DEXs), which are protocols written in code on top of the ethereum network.

DEXs have unlocked access to liquidity and automated market making. In effect, DEXs work around traditional problems surrounding economies of scale, thereby cutting out institutional intermediaries such as banks.

One of the leading DEXs in existence is Uniswap, which -- through a market-making model -- allows participants to post liquidity and swap currencies. The fees charged for swaps are passed onto liquidity providers as trading revenue.

Proof Of Concept: SushiSwap

SushiSwap is not only famous for its lead developer ditching the project and taking money from the developer’s fund, but for its rewards to liquidity providers.

Unlike Uniswap, SushiSwap provides users that post liquidity with governance tokens; liquidity providers earn 0.25% of trading fees and can convert the remaining 0.05% into SUSHI token rewards that hold governance rights.

Simply put, token holders become part owners of the exchange and earn profit share.

In light of the recent SushiSwap migration, led by early investor Sam Bankman-Fried, CEO at FTX and Alameda Research, SushiSwap is now one of the largest decentralized exchanges.

With the migration complete, three key outcomes have resulted.

The first, SUSHI token rewards will flow to new SushiSwap liquidity pool providers. Second, SushiSwap chose nine multisig users that would govern over platform changes. Third, the SushiSwap development is reflective of a model that dispels the need for institutional middlemen that deal in market making. Instead, the platform directly matches up liquidity providers and liquidity takers. Costs are low and incentives are aligned.

Future Of Finance Takes Shape

SushiSwap is, on an ideological basis, a proof of concept, or solution that will further bring society to a place in which banks no longer exist in the same capacity they do today.

In theory, as institutions such as the Federal Reserve and JPMorgan Chase & Co JPM, among others, construct blockchain technologies to yield digital currencies that are aligned with their primitive fiat counterparts, society will move further into a trustless, decentralized world in which fraud is distinguished and incentives are aligned.

Until then, whether SushiSwap grows or shrinks, it's a reflection that DeFi -- due to its impact on incentives -- has more merit to it than once thought.

In a statement on the future of DeFi, Bankman-Fried noted:

“[Y]ou can imagine a huge amount of the world infrastructure ending up on chain from crypto trades to non-crypto trades, to file-transfer protocols, to messaging and social media platforms. How do we get there? The answer is we need to build out really powerful systems that scale to that. In the end come down to execution. And hopefully we can grab the opportunity and get there.”