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Crypto Conversation: Let's Unpack the SushiSwap and Uniswap Drama

Did SushiSwap really 'steal' liquidity from Uniswap?

What’s hot in crypto this week? 

Uniswap -- it is a decentralized exchange built on top of Ethereum. It allows users to swap ERC20 tokens without the need for buyers and sellers to create demand. Uniswap works with a model that involves liquidity providers creating liquidity pools. This system allows for a decentralized pricing mechanism that essentially smooths out order book depth.

What's New With Uniswap?

Uniswap on Sept. 16 launched its governance token, UNI, to keep up with SushiSwap. Remember, its competitors, SushiSwap, is a fork of the code of Uniswap that was the largest decentralized exchange or automated market maker. 

Uniswap minted a billion coins to be released to the public over the next four years as a reward for staking in Uniswap liquidity pools. On top of attracting massive liquidity, the launch of SUSHI had also framed SushiSwap as more decentralized than Uniswap. 

Remember, SushiSwap, which launched on Aug. 27, introduced the $SUSHI token as a new form of reward for users who staked liquidity tokens into a few specific Uniswap liquidity pools (total liquidity in those pools is in orange). 

Flipside Crypto 09-2020 Sushi_Uniswap_TVL

This generated over $1 billion in liquidity in four days, and many people called it a “vampire protocol” due to its intention of sucking Uniswap’s liquidity and migrating it to its own ecosystem. 

The plan was always for SushiSwap to migrate over to its own protocol. Users who deposited their liquidity into the Sushi tapped Uniswap liquidity pools, had their liquidity pool tokens held in a smart contract that would migrate over to SushiSwap. They had three days to decide if they wanted their Uniswap LP tokens to be turned into SushiSwap LP tokens. 

On Sept. 9, SushiSwap Migrated over $800 million in liquidity funds. 

What’s Flipside’s Take? 

SushiSwap did not “steal” liquidity from Uniswap. In fact, Uniswap only benefited from SushiSwap’s enormous liquidity and riveting drama. 

The dark purple in the chart represents the amount of liquidity in Uniswap pools that were not tapped by SushiSwap. This baseline gradually increased with the launch of $SUSHI, and gained considerable traction with the launch of the $UNI token. 

The steep increase in liquidity in the Sushi tapped Uniswap liquidity pools (in orange) can be attributed to the launch of $SUSHI. Users who staked their LP tokens in these pools would receive $SUSHI as an added reward if they migrated over to SushiSwap on Sept. 8. 

In grey is the amount of liquidity that did migrate over from Uniswap to Sushiswap. Most of this liquidity appears to be new money that only entered Uniswap with the promise of SUSHI rewards. 

Most people chose to migrate over to SushiSwap to keep earning $SUSHI as reward for staking. At the time, Uniswap’s LP reward was the 0.3% fee on all trades divided up between liquidity providers of each pool, which is less appealing than gaining extra $SUSHI, worth around $2 on Oct. 9. 

The launch of $UNI clearly boosted the amount of liquidity deposited in Uniswap liquidity pools. Uniswap is currently the largest market maker, with over $2 billion in total value locked. In comparison, SushiSwap currently has $383.1 million.