7 Things to Know Before You Buy SushiSwap (SUSHI)

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It's more than just a cryptocurrency named after your favorite food.

Launched in August 2020, SushiSwap (SUSHI) is both a cryptocurrency token and a decentralized exchange. The exchange offers a platform for anyone to swap cryptocurrency -- hence the word "swap" in the second half of its name. As for the first half, the creator presumably likes sushi.

Even though SushiSwap aims for a fun environment, it's no joke. The exchange has over $3 billion in liquidity at the time of this writing, and the cryptocurrency's price has increased by over 1,500% since November, according to CoinMarketCap data. If you're thinking of becoming one of what SushiSwap calls its "sushi chefs," here's what you should know first.

1. SushiSwap is an automated market maker based on Uniswap's code

SushiSwap is a type of decentralized exchange called an automated market maker (AMM). It lets users trade cryptocurrency tokens, but there's no central authority managing trades. Instead, SushiSwap automatically sets prices with mathematical formulas and processes trades using smart contracts.

Where do all these cryptocurrency funds come from? For that, SushiSwap has liquidity pools, or large pools of funds. Its users lend their own crypto to these liquidity pools in exchange for rewards.

SushiSwap isn't the first AMM. It's based on another: Uniswap (UNI). An anonymous developer under the pseudonym Chef Nomi forked Uniswap's code, meaning they used that code to create SushiSwap.

2. It all started with a "vampire attack"

The problem SushiSwap faced at launch was bringing in users who would provide liquidity by lending their crypto. People could already do that with Uniswap, so there would need to be some incentive to get them to switch to a new exchange.

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Chef Nomi provided that incentive through SushiSwap tokens. Users could receive these by making deposits to SushiSwap. And Chef Nomi came up with a tactic to help SushiSwap gain an edge on its rival. Users would have to deposit Uniswap tokens to earn rewards on SushiSwap. Thanks to SushiSwap's rewards, those who switched to it would earn more than they could on Uniswap.

This has been referred to as a "vampire attack" because it led to liquidity being drained from Uniswap and added to SushiSwap. In the end, SushiSwap gained about $810 million in crypto funds. But the event led to so much attention that both exchanges ended up attracting far more users.

3. The original developer did a rug pull -- but then returned the funds

SushiSwap hasn't been without controversy. Very early on, Chef Nomi committed a common scam known as a rug pull. This is when a developer takes investor funds from a project.

Chef Nomi took more than 2.5 million SushiSwap tokens and 20,000 Ethereum on Sept. 5, 2020, only a week after the exchange's launch. At the time, the crypto taken was worth about $14 million.

Many in the SushiSwap community were upset, but it wasn't the end. Sam Bankman-Fried, CEO of crypto exchange FTX and an early SushiSwap investor, offered to take over the project and donate 5 million SushiSwap tokens.

A new team was put together to run the project. Chef Nomi also apologized to the community and returned all the crypto he took.

4. Users can swap cryptocurrencies, borrow, and earn rewards

There are several things you can do on SushiSwap:

  • Swap: Trade one cryptocurrency for another, such as turning your USD Coin (USDC) into Ethereum (ETH).
  • Farm: Deposit crypto into one of SushiSwap's liquidity pools to earn rewards. Liquidity pools contain combinations of two or more cryptocurrencies, and you must deposit an equal amount of each one.
  • Stake: Deposit your SushiSwap tokens to earn rewards.
  • Lend: Provide crypto for others to borrow and earn interest on it.
  • Borrow: Borrow crypto after providing collateral.

5. You don't need an account to use SushiSwap

If you're used to centralized cryptocurrency exchanges, the SushiSwap experience is much different. You don't create an account or go through an identity verification process.

All you need to use SushiSwap is a crypto wallet. On the SushiSwap app, you connect your wallet, and then you can use it to swap, lend, or borrow crypto.

It's much quicker than getting started with a centralized exchange, but you need to have cryptocurrency funds already. You can't buy crypto on SushiSwap through your bank account or debit card. Most users do that on a centralized exchange first. After that, they move the funds to a crypto wallet and connect it to SushiSwap.

6. The SushiSwap cryptocurrency is a governance token

As a governance token, SushiSwap gives holders voting rights on the future of the exchange. If you buy SushiSwap, you can vote on proposals and help determine what happens with it.

That's not the only reason to hold SushiSwap, though. You can also stake your tokens on the SushiSwap app. If you do, you'll receive a share of the swap fees on the exchange. Since this is an easy way to earn more crypto, it's something all SushiSwap holders should do.

Last but not least, if the SushiSwap exchange continues growing in popularity, then the price of its cryptocurrency could grow with it.

7. It's in a competitive market

SushiSwap is an exciting project, but it's important to keep in mind that it's far from the only decentralized exchange making waves. Its inspiration, Uniswap, still usually has much more daily trading activity.

Many other decentralized exchanges have launched in the last year, with PancakeSwap being another that has attracted considerable attention. It remains to be seen how many of these decentralized exchanges will have long-term success.

If you want to buy SushiSwap, it's available on several crypto exchanges. Make sure to check out some of its competitors as well if decentralized finance (DeFi) applications are of interest to you. And remember that like all crypto, SushiSwap is risky, so you shouldn't spend more on it than you could afford to lose.

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