What is SushiSwap?
SushiSwap — often referred to as just Sushi — is an automated market maker (AMM) system built on top of the Ethereum blockchain. AMMs are tools for the DeFI (decentralized finance) sector by helping to power the market’s liquidity. Instead of directly pairing buyers and sellers of crypto assets, AMMs like Sushi create liquidity pools of assets available to trade and leverage smart contracts to execute trading automatically.
SushiSwap is a fork from the Uniswap protocol (see below in this Help Centre article for an overview of Uniswap), and the project had a rocky birth. Its pseudonymous founder, Chef Nomi, pitched the project as a similar system to Uniswap but with added functionality, namely a governance token providing voting rights to holders. As a way of distributing the initial SUSHI tokens, Chef Nomi invited supporters to stake Uniswap Liquidity Provider (LP) tokens on Sushi to earn SUSHI, claiming that they would then exchange the staked Uniswap assets for funds to power further development of the Sushi project. Instead, however, Chef Nomi withdrew the funds for themselves. Long dramatic story short, the funds were returned and control of the protocol was handed over to the CEO of FTX, a crypto exchange.
A deep dive on the mathematical formulas guiding liquidity pool trading is not necessary here, but it essentially recreates supply-and-demand economics at the asset level. This ensures that the price of assets in the pools tracks reasonably close to its true market price. Traders do pay a trading fee, however, which is distributed to liquidity providers to incentivize participation in the platform.
Decisions on how the Sushi protocol operates and evolves over time are made by its community, defined as holders of the protocol’s governance token, SUSHI. Notably, in December 2020, Sushi joined forces with yearn.finance, another DeFi protocol, which means that they will share development resources and some market infrastructure, among other aspects of the platforms.
What is the SUSHI token?
SUSHI is an ERC-20 token created by the Sushi protocol intended to ensure distributed and participatory governance. Anyone who holds SUSHI tokens can stake them to earn both voting rights and rewards. Voting rights allow holders to vote on proposals from the Sushi community to make changes to the protocol. Staked SUSHI also earns stakers a percentage of the platform’s trading fees charged to traders, proportional to the amount of SUSHI staked (and 2/3 of the SUSHI rewards earned must vest for a period of time before they can be cashed out.)
How does SUSHI compare to Bitcoin?
SUSHI differs from Bitcoin in a few key ways.
First, SUSHI is an ERC-20 token, meaning it is a token that runs on—and is backed by—the Ethereum blockchain. This means that SUSHI does not have its own miners. Ethereum miners perform the task of processing and validating SUSHI transactions, just like how Bitcoin miners process and validate bitcoin transactions. SUSHI is minted with each Ethereum block but at a slowing pace (the decreasing pace does sort of mirror Bitcoin.)
The second major difference between SUSHI and Bitcoin is their age. Sushi was only launched in August 2020 compared to Bitcoin’s 12 or so years, which means it’s less proven, less distributed, and has a significantly smaller market value than Bitcoin.
Similar to Bitcoin, a malicious participant or group of participants who gain enough control could negatively impact the value of the asset. If one person or an aligned group of SUSHI holders decided to manipulate its development, they could draft a malicious proposal and vote it through (similar concentration risk to a 51% attack on the blockchain.) This risk is much higher for an asset like SUSHI that has such a limited supply of tokens.
However, it should be noted that, although SUSHI is different from Bitcoin, it is far from independent from it.
Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that SUSHI will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) And if Ethereum, the coin that powers the blockchain that supports SUSHI, crashes, then SUSHI’s price could be impacted. In addition, as an AMM platform that trades various crypto assets, the Sushi protocol and thus potentially SUSHI’s value would react to any dramatic fluctuation in a prominent crypto asset’s value. However, if SUSHI crashes, Bitcoin may be less likely to get hurt by virtue of its size.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Sushiswap, including an opinion that SUSHI is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of SUSHI prior to making it available on Wealthsimple Crypto and has concluded that SUSHI is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated SUSHI based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of SUSHI, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created SUSHI;
- The supply, demand, maturity, utility and liquidity of SUSHI;
- Material technical risks associated with SUSHI, including any code defects, security breaches and other threats concerning SUSHI and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with SUSHI, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of SUSHI.
Like all other crypto assets, there are some general risks to investing in SUSHI. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that even when compared to other DeFi protocols, SUSHI presents an elevated short history risk, and that SUSHI also carries an elevated concentration risk. Further, the Sushiswap community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of SUSHI have no recourse to SUSHI or Wealthsimple if SUSHI declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading SUSHI. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021