The decentralised finance (DeFi) platform is introducing a new tokenomics model to improve liquidity and protocol development. The model was proposed after the exchange faced losses of over $30 million in the past year due to implementing the current incentive model.
Decentralised crypto exchange (DEX) SushiSwap is revamping tokenomics of its native SUSHI token. On December 30, the CEO Jared Gray submitted a proposal to the Sushi Forum, a group of token holders that make governance decisions for the platform, suggesting an optimal token model that would incentivise liquidity and promote decentralisation.
The proposal introduces a new token burning mechanism, a liquidity lock system for price support, and time-locked staking periods for emission-based rewards. Gray also noted that the upgrades will help bolster reserves in Sushi’s treasury, ensuring that operations and development of the protocol continues. The move comes after SushiSwap revealed that it had less than two years of liquidity left in its treasury, putting the DEX’s future at risk. At this point, it was more than necessary that the company redesign its tokenomics.
According to the proposed model, 0.05% of fees generated from token swaps will be allocated to liquidity providers (LP) – those who stake SUSHI to provide liquidity for the platform, with a larger part of the fees going to pools that provided the highest volume. Liquidity providers can lock their tokens for designated periods to earn higher, emission-based rewards. But they would risk losing their rewards if the SUSHI is removed before maturity, as it will be forfeited and burnt.
Staked SUSHI (xSUSHI) tokens are not eligible for any swap fee rewards, but will receive emission-based rewards from the proof-of-stake (PoS) blockchain network. The SUSHI rewards will be given out in time-locked tiers, with users receiving more rewards the longer they stake their xSUSHI tokens. Similar to LPs, users who remove their tokens before maturity will have their rewards forfeited. SushiSwap says that its time locks are “soft locks”, meaning liquidity providers can remove their collateral before the term ends. However, time locks have auto-renew capabilities that if not manually terminated, will compound in a new time lock.
SushiSwap will use a variable percentage of the 0.05% swap fee to buy back SUSHI tokens, and burn it to permanently remove them from circulation. The percentage points will change based on the total time-lock tiers that are selected at a given time. The company explained that even though time-locks get rewarded after maturity, token burn happens in real-time. When a large amount of xSUSHI or SUSHI gets unstaked before maturity, it has a deflationary effect on token supply, impacting liquidity of the protocol.
The exchange will use a portion of the swap fee to lock liquidity for SUSHI’s price support, while introducing a nominal 1-3% APY (annual percentage yield) for emission rewards. With the upgrade, SushiSwap aims to maintain its token supply within a predictable margin by balancing token purchases, burns and locked staking.
“Ultimately our goal is to help provide long-term value for token holders and liquidity providers without extractive qualities and detriment to either party. This new model promotes a holistic and sustainable value that scales with the DEX while boosting deeper liquidity to help revitalise the Sushi ecosystem,” wrote Jared Gray.
Crypto media outlet Cointelegraph reports that over the past 12 months, due to implementing its emission-based token strategy, SushiSwap lost over $30 million on incentives given out to LPs. This was a major reason why the DeFi platform decided to introduce a new tokenomics model.
At the time of writing, SUSHI is trading at $0.95 – up 4% in the last 24-hours, while xSUSHI is trading $1.29 – up by over 3.5% in the same period.