Decentralized exchanges (or DEXs) have come a long way from being just another way to trade or swap assets. A new generation of DEXs have arrived and they are changing the way traders and savers alike are swapping and saving their Ethereum ERC-20 tokens.
One of the new generation of DEXs is Sushiswap. On top of making low cost trades without needing to trust an exchange, Sushiswap has some advanced features including liquidity farming that lets you earn a return in exchange for taking on some risk.
Join us as we go over Sushiswap – what it is, how it works, and what you need to be aware of before signing up.
Getting Started With Sushiswap
Using Sushiswap will be familiar to anyone who has used Uniswap. If you are new to both services there is a bit of learning curve. Whether you are making trades or want to participate in liquidity farming, you’ll need to connect an Ethereum wallet.
Currently the platform supports Metamask and WalletConnection-compatible wallets. Once your wallet is connected, you’ll be able to make trades by authorizing the individual transactions as they pop-up in your wallet.
Sushiswap has quite a few official web addresses. Always be careful and make sure you are visiting the correct site and not an imposter site. Currently, their primary site can be found at www.sushiswap.fi.
Once you’ve arrived, trades can be made from the Quick Swap menu option on the top left of the page. Next, choose the assets you want to trade. Typically this with be ETH for a token, tokens for tokens, or tokens for ETH. Since Sushiswap is a DEX, the number of assets it supports is enormous.
If you’re looking to participate in liquidity farming, you’ll need to deposit both coins from a pair of assets, such as USDT and ETH. Each liquidity pool is made up of a different asset pair. More instructions for this process can be found on the Sushiswap official page. It’s definitely not for beginners to cryptocurrency and online crypto apps.
Earning On Liquidity Farming / Yield Farming
Decentralized exchanges can sometimes suffer from a lack of liquidity. In simple terms, liquidity means the ease of which something can be bought and sold. Fiat currencies like dollars are extremely liquid as they can be traded in seconds for goods, services, investments and so on. A bar of gold, on the other hand, is a lot less liquid. It needs to be verified as real gold, the seller needs to find a face-to-face buyer, and so on.
Cryptocurrencies – especially smaller and newer ones – can have liquidity problems, too. If you want to sell a token on an exchange, it could be hard to find a buyer or vice-versa. Sushiswap has an innovative solution to this.
The platform encourages individuals to act as liquidity providers by depositing assets into a smart contract called a liquidity pool. This liquidity pools serves traders on both sides by acting as a middleman. To reward users who help fund the liquidity pool, they are given a share of the trading fees earned by the platform.
It’s a little bit like staking, but instead of earning block rewards, users earn trading fees which depend on how many trades are happening. Earning trading fees in this way is often called liquidity farming or yield farming.
The service also offers a rotating “menu of the week” where Sushiswap will “present exciting new projects or projects gaining traction recently that we wish to boost liquidity of in our exchange.” In other words, the platform offers special incentive rates to participate in new token offerings so that there will be more liquidity available.
During our research, we found that the rates offered by Sushiswap ranged from 0% to 0.99% interest per day, or over 360% per year. Yes, that’s not a typo. More on that in a moment.
Is Sushiswap Safe?
Sushiswap is definitely popular. But popular doesn’t necessarily mean safe. Bitconnect was popular, and investors lost untold fortunes when it collapsed. While no one can say for sure whether or not the platform is absolutely safe, we can certainly dig into some of the details.
First, we need to look at who owns Sushiswap. Unlike some other DeFi services that are owned by corporations registered with various governments, the ownership of Sushiswap is a mystery. Currently, all that’s known is that it’s owned by two pseudonymous individuals who use the names Chef Nomi and 0xMaki. The platform is not formally insured in the event of losses, hacks, or smart contract problems.
Another point to consider for those interested in liquidity farming is the rates that are being offered. On the high end, Sushiswap is offering up to just under 1% per day, or 361% per year. It’s safe to say that these kinds of rates are not sustainable long-term. The best reliable investments in the world rarely yield more than 5% per year. Some of the bigger interest-offering DeFi platforms are only offering up to around 8% for comparison.
After doing some calculations, we found that a $1,000 equivalent initial deposit at 361% APR, compounding daily, would net a shocking $36,316.23 after one year. What’s most likely happening here is that these are temporary rates that last for only a few days or perhaps a week at a time.
Looking at a non-promotional rate, we found a pool for AAVE and ETH offering 0.15% daily or 53.15% annually. At these rates, our $1,000 equivalent deposit would be worth slightly more than $1,700 at the end of a year. Again, this rate of return is practically unheard of. It has left us wondering how legitimate it really is.
Sushiswap is still a fairly new platform. It’s native token, SUSHI, only hit the markets in September of 2020. In that time, prices have increased from $2.45 to hovering around $7 at press time. From our research, we haven’t found many complaints about the site. It may be too early to tell how reliable the service is over the long term, however.
Swap It, Or Leave It?
For individuals looking for a quick and fairly easy to use DEX to make trades of Ethereum assets, Sushiswap looks to be a decent choice. It is based on the proven technology behind Uniswap and its certainly very popular. Not only that, but some newer assets seem to be only trading on Sushiswap. The offering of liquidity pools could make it easier to get your hands on some of these newer, smaller assets that lack regular buyers and sellers on other exchanges.
For those looking to earn a return from liquidity farming, on the other hand, we recommend some caution. We don’t know who owns or is running Sushiswap. From our research, it appears that the platform has not had its smart contracts audited yet. Lastly, the rates promised for liquidity providers seem outlandish at best, if not downright unrealistic.
The bottom line for us as far a liquidity farming goes is that if you have some spare assets that you are willing to risk in hopes of getting a huge reward, make sure you understand the risks. Don’t put up collateral that you aren’t willing to lose in case something unforeseen happens.
Is Sushiswap a reliable platform? Would you put your money up and try liquidity farming? Give us your take in the comments below.