Headline: What is Uniswap and Sushiswap, and what part do they have to play in DeFi?
Body: A reminder of terms is in order (I promise, it will be brief.) Cryptocurrency is part of a movement called decentralized finance, (DeFi) and it is aimed at democratizing finance by eschewing a central authority. One particularly well-known exchange for these currencies is Coinbase, but they are a centralized exchange, so, it is relatively expensive and has a central authority, even though it is not a state. Uniswap and Sushiswap are examples of de-centralized exchanges where some knowledge of coding is very helpful (really DIY environment) and it is very cheap, and bereft of any centralized authority. But, there are some differences that make Uniswap and Sushiswap optimal for different people. Let’s learn just a little about each.
What is Uniswap?
Uniswap is a leading decentralized (est. 2018) crypto exchange that runs on the Ethereum blockchain, and instead of a centralized order book, relies upon an automated liquidity protocol. One advantage is that each user of this exchange retains their own private key, so, even if the exchange is hacked, the damages can be minimized. Uniswap is currently the 4th largest decentralized exchange, with over $3 Billion in assets.
Key to their success is the automated liquidity pool, taking the place of the centralized order book. When a person invests in Uniswap, they become a portion of one of many pools of assets. When they exit the pool, they receive a proportional amount of the fees earned by the pool members. For instance, say a liquidity provider (investor) provided $100,000 to a pool worth $1,000,000, they would be entitled to receive 10% of the fees received for the pool’s liquidity-providing activities, when they decided to leave. So under this system, if the pool is deep enough, any transaction can be consummated nearly immediately.
Whoa, what EXACTLY are they token?
Here’s where the arms race began. At first, there was Uniswap, then, a “cell” broke off and produced Sushiswap. At this site, the developers, from the beginning, had their own token called Sushi, which gives holders rights to vote on governance issues and profit from the transaction fees gained by the site. Then, Uniswap became very threatened that everybody would leave their site, and launched UNI, and this token allows holders to vote on governance issues and fee structure issues. Much like the Army Rangers, they airdropped 400 of these tokens to anybody who had ever used their site. (and this had a value of about $1,000.) Just like any arms race, this too was quite expensive.
Uniswap users can participate in the decentralized exchange in several ways:
- Create new markets: Uniswap users can use smart contracts to create new markets for exchanging new pairs of digital assets.
- Swap assets via existing markets: Uniswap can use the platform to swap digital assets via decentralized markets that have already been created.
- Provide liquidity and earn rewards: Uniswap users can provide liquidity by staking—agreeing to not trade or sell—their digital assets. Those who stake their digital currencies on the Uniswap platform are rewarded with UNI.2
- Participate in Uniswap governance: UNI token holders are empowered to govern the Uniswap platform, with voting power distributed in proportion to users’ UNI balances.1
What is SushiSwap and how does it work?
SushiSwap is an Ethereum-blockchain DEX founded by pseudonymous open-source developers Chef Nomi and 0xMaki and initially launched as a copy of Uniswap. (This is a really important thing to think of. If these 2 sites are Tom and Jerry from cartoons, always trying to hilariously and lethally hurt one another, Uniswap is Tom, and Sushiswap is Jerry.)
SushiSwap seems to work in the same way that UniSwap does, but,it seems that the initial ways to make money including staking transactions, and this was only available on the Ethereum blockchain as the consensus model moved away from the Proof of Work. Other than that, the differences seem to relate to marketing. The variety of ways to make money, are presented through a group of programs known as Bento box program, of course. These methods of earning a return include staking, yield farming and many others. (They also seem to use some brand names, and I have to wonder why this has been allowed, by the companies that own the intellectual property.) But, by far, the easiest way to make money here is to become a liquidity provider. (SushiSwap also seems to support more cryptocurrencies, currently trading 11,700 distinct pairs of currencies.) Also different is how gas fees are charged. UniSwap has several categories of different gas fees, and SushiSwap seems to have a much more uniform (though often lower) gas fee being charged. Finally, UniSwap handles 10 times the trading volume that SushiSwap does.
The Verdict
OK, quick caveat here. The sources used to write this column are all aimed at explaining how incredibly “easy” it is to use a decentralized exchange. In all other trusted sources of information, using these exchanges are often “janky” and require at least some elementary level of coding knowledge. (Though this, like the word “janky” might be a bit out of date.) Point is, if you aren’t trading cryptocurrencies at a very high rate (read as multiple times per day) it might behoove you to stick to the centralized exchanges. The gas fees are a little higher, but, the “hand-holding” provided is probably worth it.
REFERENCES
https://www.coindesk.com/business/2021/02/04/what-is-uniswap-a-complete-beginners-guide/
https://www.investopedia.com/uniswap-uni-definition-5217463
https://www.coindesk.com/learn/what-is-sushiswap-how-to-get-started-on-the-crypto-exchange/
https://www.investopedia.com/sushi-token-5248641
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.