The Sushi Chronicles

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It’s been described as the world’s first legal billion dollar heist. However, it wasn’t a bag of cash that was stolen. It was liquidity.

The SushiSwap drama has all of the makings of a Michael Lewis novel, featuring a sci-fi corporate takeover that would make T. Boone Pickens blush.

In typical crypto fashion, it all played out at breakneck speed full of twists and turns featuring cartoon Pandas and 11th hour heroics. Even for many deep in the DeFi weeds, the whole saga is difficult to follow. Here, I’ll aim to unpack what went down as simply as possible.

From Compound to YFI, to Sushi

This all kicked off when Compound Finance launched its liquidity mining program back in June. In exchange for lending and borrowing assets on Compound, and bootstrapping Compound’s money markets users received COMP tokens. Total value locked in Compound skyrocketed along with the price of COMP and people took notice.

The next phase came after Yearn Finance introduced the idea of a “fair launch” to liquidity mining. Where Compound was VC backed with early tokens going to the team and early investors, Yearn creator Andre Cronje allowed anyone to earn YFI tokens by locking capital into Yearn. No tokens were allocated to himself or outside investors and all tokens were distributed to users who farmed YFI. Backed by this clear, community first mindset, YFI’s market cap went from $0 to $1B in six weeks.

Next came the memecoins. Yam.Finance, Ham.Finance, Spaghetti Money. Like YFI, these protocols all conducted “fair launches” that yielded governance tokens in exchange for staking certain assets in their contracts. Unlike Compound and YFI, which put user’s capital to productive use by provisioning liquidity, these memecoin protocols didn’t actually do anything useful. They were mainly zero-sum games where early participants who could acquire the tokens for free via liquidity mining, hype them up and then dump them on suckers on the open market before the bottom fell out.

When SushiSwap was announced, it sounded like just another useless memecoin. In the two weeks following, it would prove to be much more.

Forking Uniswap

We’ve referred to memecoins like Yam.Finance as frankenstein coins because they’re created by forking elements of different protocols. Copy and paste some code from YFI and a complex stablecoin called Ampleforth and you get a ponzi-scheme like digital vegetable.

SushiSwap however, made waves when it announced in late August that it would be forking Uniswap: the decentralized exchange at the heart of the DeFi craze. SushiSwap’s announcement detailed plans for essentially copying and pasting Uniswap’s code and adding a token on top of it: SUSHI token. The idea being to create a more community owned Uniswap that rewarded early liquidity providers for their crucial role in bootstrapping the exchange.

While SushiSwap followed the standard memecoin playbook (fork protocol + add meme token), it came with an interesting wrinkle: a planned “liquidity migration” that would send shockwaves throughout the DeFi community over the ensuing two weeks.

The AMM King

The script becomes difficult to follow without understanding the basics of Uniswap. Uniswap is a specific type of decentralized exchange (DEX) called an automated market maker (AMM). Where other DEXs like 0x employ an orderbook model that matches buyers with sellers, AMMs use pools of liquidity that are always willing to buy or sell a pair of assets.

For example, if you have some DAI and ETH lying around, you can commit it to a Uniswap DAI/ETH pool. In return, Uniswap gives you an LP token (liquidity provider token). As Uniswap users exchange ETH for DAI and vice versa in the ETH/DAI pool, your LP tokens allow you to collect trading fees. Those same LP tokens also allow you to redeem your liquidity whenever you want.

Uniswap has thrived in an environment where new tokens are coming out of the woodwork. Where centralized exchanges require deep interest and liquidity to support a new token, Uniswap’s model can support a long tail of assets. They simply need a handful of liquidity providers willing to commit those tokens to a Uniswap liquidity pool. The beauty of Uniswap is that no one needs to ask anyone’s permission to participate and add tokens to Uniswap liquidity pools.

While its LP tokens are essential for Uniswap to function, it has no overarching governance token. In an industry full of useless tokens designed to enrich founders and early investors, Uniswap had long been celebrated for this tokenless model. In the new DeFi wild west, this would prove to be an attack vector.

The Panda Chef Drinks Your Milkshake

The person behind SushiSwap came in the form of a pseudonymous PandaChef going by the name Chef Nomi.

Chef Nomi and SushiSwaps’ plan hinged on copying and pasting Uniswap’s code and adding stronger incentives for liquidity providers via a governance token ($SUSHI). Where Uniswap paid a .30% fee solely to liquidity providers, SushiSwap would pay .25% fee to liquidity providers with the remaining .5% would then be converted into $SUSHI and distributed back to existing SUSHI holders. The idea being to reward early liquidity providers for their role in building out SushiSwap’s liquidity. Additionally, 10% of every SUSHI distribution would be put aside in a “development fund” (this fund becomes key later on).

The way you acquire SUSHI? Take your Uniswap LP tokens and stake them to a SushiSwap contract. So if you took the LP tokens you received from committing your DAI/ETH to Uniswap and staked it to SushiSwap, you’d be rewarded with SUSHI tokens. Uniswap LPs answered the call and staked $1.6B Uniswap LP tokens to SushiSwap. This actually had the effect of bringing more liquidity to Uniswap as people committed capital to Uniswap in order to receive LP tokens they could stake on SushiSwap to receive more SUSHI.

This is where the liquidity migration comes into play. Recall that LP tokens represent underlying liquidity on Uniswap - DAI/ETH in our example. Up to this point, your DAI/ETH still sits on Uniswap while our LP tokens are locked into SushiSwap, yielding SUSHI tokens. When Chef Nomi’s liquidity migration kicked in, your LP token would be redeemed for the underlying ETH/DAI on Uniswap and migrated to SushiSwap.

In other words, this was a clever way for SushiSwap to essentially drink Uniswap’s milkshake.

The Panda Chef pulls the rug

Chef Nomi’s plan was in motion and DeFi alchemy was on full display as newly incepted SUSHI tokens went from $0 to over $10. SUSHI token was even listed by centralized exchanges Binance and FTX. Early participants were able to make millions by selling their SUSHI tokens to speculators on the open market.

Then, as DeFi token prices started to plummet heading into Labor Day Weekend, Chef Nomi threw in a plot twist. Remember that development fund where 10% of newly minted SUSHI was placed? Chef Nomi was in sole control of it and on September 5th, he sold $14M of it for ETH and then pocketed it. The price of SUSHI tanked 70%.

Chef Nomi claimed he was doing it for the good of the community and that by dumping his SUSHI, price would no longer be a distraction and he could concentrate on the migration. The newly formed Sushi community were not having any of it and twitter was ablaze with outrage.

Enter SBF

Many thought this spelled the end of the SushiSwap experiment. But regardless of SUSHI’s plummeting price, there was over a billion dollars of value locked into SUSHI and a ton of vested interest. The problem was that Chef Nomi was in sole control of SushiSwap's code.

From the chaos emerged Sam Bankman-Fried: CEO of trading firm Alameda Research and FTX, which is one of the exchanges that listed SUSHI. Sam took to Twitter and laid out a plan for Chef Nomi to hand over his keys to the Sushi kingdom so the migration could continue as planned. While Sam didn’t outright suggest Nomi hand the keys directly to him, that’s exactly what the Panda chef did.

On September 6th, Chef Nomi transferred the admin keys to Sam and faded back into obscurity (or so it seemed).

Since having the admin keys in the hands of one person is what landed SushiSwap into trouble in the first place, Sam’s plan was to put the keys into a multi-sig contract. Multi-sig contracts require multiple people to sign-off before making changes. This would prevent say, one person from dumping the entire SUSHI development fund on the open market.

To determine who would be able to have access to the multi-signature contract, an election was held via popular vote by SUSHI holders. In addition to Sam, Compound Finance founder Robert Leschner, The Block’s Larry Cermak, and CMS Holdings (prop trading firm) were elected among others. Crisis was averted and the Sushi community had successfully shook off Chef Nomi’s betrayal. The migration was on.

Game On

On September 9th, the migration went into effect. Anyone staking Uniswap LP tokens on SushiSwap would have their token’s underlying liquidity redeemed and migrated over to SushiSwap. Returning to our example, with the migration live your Uniswap LP tokens would be redeemed for the underlying ETH/DAI and moved off Uniswap to SushiSwap. You’d then be given SushiSwap LP tokens and continue collecting trading fees plus new SUSHI token. Simple right?

This mechanism drained half of Uniswap’s liquidity. SushiSwap went from having $810M Uniswap LP tokens staked to $1.2B in total value locked across multiple pools of liquidity. A good portion of Uniswap’s milkshake had been consumed.

Source DeFi Pulse

SushiSwap TVL post liquidity migration:

Source: SushiSwap Protocol Analytics

The Liquidity Wars are here

This whole saga didn’t spell any real disaster by Uniswap by any means. As Cami Russo pointed out (who’s Defiant newsletter coverage I leaned on a lot here), the amount of liquidity in Uniswap actually grew throughout the entire fiasco.

It does showcase a new kind of battlefront that’s only possible in the world of open source code and composability. Uniswap is the product of four years of work as well as a healthy amount of venture funding. In this new frontier, a cartoon panda and a community backed by mercenary capital can commandeer a billion dollars worth of hard earned liquidity with some clever token incentives.

Liquidity is not a moat when capital can move at the speed of the internet. Welcome to the wild wild west that is DeFi.

PS - In yet another plot twist, as we were writing this, Chef Nomi returned all of the ETH, now worth $14M to the Sushi treasury in an effort to rejoin the community. You can’t make this stuff up.

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