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SushiSwap’s second vampire attack is testing Uniswap’s community governance mechanisms

2020.11.18 Robbie Liu

The pressure is on Uniswap and its community governance as yield farmers move to competitors — Crypto Market Update

Liquidity mining on Uniswap ended yesterday. The total value locked in the leading decentralized exchange peaked at $3.068 billion on Nov. 14 and decreased to $2.718 billion by the end of the distribution of mining rewards. It then quickly fell by nearly half, to $1.452 billion, on Nov. 18, per data from DeFi Pulse

As incentives dry up on Uniswap, yield farmers are looking around for more productive places to provide liquidity. Primary competitor SushiSwap has been the biggest beneficiary, with its TVL rising from $24 million on Nov. 8 to the current $1.027 billion. Other decentralized exchanges have all seen rapid TVL growth, such as Curve and Balancer. 

The TVL in Uniswap plummeted as it rose in SushiSwap. Source: DeFi Pulse

Since Uniswap's liquidity mining had a clear timetable for its cessation, this allowed its primary competitor to be well-prepared to attract liquidity. SushiSwap started the exact same pools as Uniswap, with boosted rewards, yesterday — including ETH/USDT, ETH/USDC, ETH/DAI and ETH/WBTC. It also provides a "Migrate" interface to facilitate the one-click transfer of liquidity from Uniswap — something many in the industry are calling a second vampire attack.

Previously, SushiSwap caused a stir by providing 10x SUSHI rewards for its liquidity mining and ended up having $1.43 billion in liquidity at its peak on Sept. 12. At the same time, Uniswap's liquidity fell from $1.82 billion to around $400 million. However, Uniswap's launch of its UNI token on Sept. 16 turned the tables and caused SushiSwap's TVL to rapidly decline. 

SushiSwap then decided to hard-cap its native token supply at 250 million tokens and reduce daily emissions, which caused some farmers to opt-out on account of decreasing yields. It also set a six-month lock-in period for two-thirds of the mining rewards in an effort to reduce short-term sell pressure. Furthermore, SushiSwap implemented Uniswap's target business model — namely, the distribution of one-sixth of the taker fees (or 0.05% of the total trading volume) to xSUSHI stakers. These measures led to renewed market expectations for SUSHI's price before Uniswap's incentives ended. After a lengthy downturn, the price of SUSHI rose by over 90% in November. 

The price of SUSHI bottomed out after a lengthy downturn. Source: TradingView

Although liquidity has shifted to SushiSwap, Uniswap is still much higher in terms of actual trading volume. The end of the latter's liquidity mining may not necessarily jeopardize its position as the top decentralized exchange. According to the website Crypto Fees, SushiSwap's current seven-day average fees total $125,876, which is only 16% of Uniswap's. More importantly, the number of users varies greatly. There were more than 25,000 users on Uniswap in the last 24 hours, while SushiSwap attracted only 607. 

The importance of the incentive system for decentralized exchanges can be clearly observed in the last two months, but current users' behaviors are the biggest barrier facing SushiSwap — the first name that comes to mind when most users swap tokens on a DEX is still Uniswap.

Uniswap is still the most popular decentralized exchange. Source: DeBank

However, Uniswap may need to take immediate action to maintain its advantage — primarily when it comes to the challenges of community governance. Uniswap's community is discussing an incentive plan to continue UNI rewards at a reduced rate of 5 million monthly UNI tokens for liquidity providers, which is 50% of its genesis phase. 

Perhaps the biggest issue is that Uniswap set requirements to submit a proposal and quorum too high. It currently requires 10 million UNI to submit a proposal and 40 million UNI to successfully pass it within the next seven days. The previous two proposals were not passed. 

The second issue is the inconsistency of interests among token holders. There is no obvious reason to vote to resume liquidity mining as a retail holder, as further emissions could bring down the price of UNI. Teams and early investors, however, may be more willing to do so. 

The third issue involves time. The plan requires a complex process and vote, and it could be as late as Dec. 4 before a new round of liquidity mining is officially launched. The obvious speed and mobility issues are currently hamstringing Uniswap, and it remains to be seen whether or not this will hinder its growth further in the face of competition.

Uniswap's proposed timeline and governance process may take weeks. Source: gov.uniswap.org

While community governance is often considered ideal for crypto projects, it is still in its very early stages. OKEx Insights will continue to follow the battle between Uniswap and SushiSwap in the coming weeks.


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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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