SushiSwap is a decentralised exchange (DEX) that launched in August 2020 (also known as DeFi summer, thanks to the large boom in popularity and growth of DeFi).
A DEX enables people to exchange cryptocurrencies without the need for a third party. Users prefer to use platform’s like Sushi instead of a centralised exchange (like Binance or Coinbase) because of the combination of the complete control of their tokens, anonymity, and the ability to purchase and exchange tokens that aren’t available on centralised exchanges.
When you hold your money on a centralised exchange, it’s like holding your money in a bank. It’s probably safer than keeping the money yourself (tucked under a mattress, or in a biscuit tin etc), but you are at the whim of the custodian. They are holding your coins, and in some cases, they may have the right to hold onto them. Holding your assets in your own wallets and using DEXs is like holding the tokens yourselves and using cash. If your money is stolen you’re on your own, but at least no one is in possession of your money, and it is at your disposal.
SUSHI acts as a DEX by operating as an automatic market maker (AMM). Simply, an AMM is a method of facilitating trading without the need for a middleman, or broker, to carry out the trade.
Exchanging currencies can get quite complicated. It’s not just a coin vs its dollar amount. When swapping an asset for another asset there are countless combinations. Think BTC/ETH, BTC/SOL, etc. Centralised exchanges (CEXs) facilitate these exchanges by matching a buy order with a sell order. This is called an orderbook – traders trade with each other, and CEXs provide the means.
But how is this done on a DEX? Without a centralised market maker routing orders, a DEX has to find another way to allow users to trade their assets. It’s not efficient to have everyone on standby to wait until two people happen to want to make a trade that compliments the other, orders could take weeks to fill. What’s the solution?
On DEXs, you have two types of people, those looking to exchange tokens and those looking to earn some money. The people who want to earn money provide liquidity. They put their tokens up as liquidity and in turn, they earn rewards based on the trading fees paid by traders using that pool. Traders use the liquidity in the pool to ‘swap’ like for like (in USD value), for example 1000 SUSHI for 1 ETH.
To note, SUSHI takes 0.3% in fees for transactions that take place in its liquidity pools. The quantity of SUSHI rewarded to liquidity providers is variable dependent on the asset combination they are providing liquidity for. The more volatile the pair, the higher interest they will earn.
To properly understand liquidity pools, check out our article here!
Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
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