- SushiSwap’s tokenomics to undergo a design process soon
- The new tokenomics to focus on liquidity and decentralization
Jared Grey, head chief and CEO of the popular DEX platform SushiSwap, proposed altering the tokenomics of the Sushi token to revive the protocol amid a liquidity crisis on December 30.
Grey sparked outrage in the SUSHI community on December 6 when he said the project’s treasury had a runway of just 1.5 years. Grey advocated that 100% of SushiSwap’s fees be transferred to Kanpai, the project’s treasury, for one year or until new tokenomics are introduced.
The previous year, the decentralized exchange (DEX) suffered a loss of $30 million due to liquidity provider (LP) incentives. As a result, the DEX has advocated for the fee diversion plan. This, in Grey’s opinion, demonstrated that the incentive system used by SushiSwap is “unsustainable” and has to be realigned.
According to the official proposal for redesigning tokenomics, the present tokenomics model gives a disproportionate share of its fee income and emissions incentives to non-LPs. Additionally, because less than 2% of users that stake xSUSHI contribute to the liquidity of any pool, the proposal made the following points:
“Helping bolster liquidity in Sushi’s pools requires the realignment of token mechanics that properly align LP activity with the most rewards and value accrual.”
Grey’s suggested tokenomics aims to reward liquidity expansion through a “holistic and sustainable reward system that grows with volume and fees.” The new tokenomics approach aims to produce additional utilities for SUSHI, “promote maximum value for all stakeholders,” and improve liquidity.
Changes Proposed to SushiSwap’s Tokenomics
The new tokenomics model will introduce a token burn mechanism, time-lock tiers for emission-based incentives, and a liquidity lock to promote price support and stability.
The notable change under the proposed new token model is that staked SUSHI (xSUSHI) will no longer get a fee income share. Instead, the revised plan states that xSUSHI will only receive emissions-based benefits paid in SUSHI.
The emissions-based rewards will be tier-based – the longer the time lock, the bigger the benefits. While customers are permitted to withdraw their collateral before the maturity of the time locks, early withdrawals result in losing awards.
Furthermore, LPs will get a portion of the 0.05% swap fee income, with the larger shares going to the liquidity pools with the most significant volumes. This will aid in rewarding LPs in proportion to their contribution to liquidity.
LPs can also lock their liquidity in exchange for further emissions-based payments. However, they risk forfeiting the benefits if they withdraw their tokens before the awards have been distributed.
SushiSwap will also utilize a configurable amount of the 0.05% exchange charge to purchase back and burn SUSHI. Tokens are burned when they are removed from the circulating supply and sent to an address where they become unrecoverable by anybody.
The forfeited rewards are burnt when xSUSHI and LPs remove their collateral from their time locks early. According to Grey, since time lock awards are paid after maturity and burn occurs in real-time under the new model when a large quantity of collateral is prematurely unstaked, it will have a significantly deflationary impact on SUSHI supply.
According to the new tokenomics plan, the DEX will allocate some of the 0.05% swap costs to locking liquidity to provide price support.
Finally, the DEX will limit SUSHI token emissions to 1-3% annual percentage yield (APY) to minimize inflation. The goal is to balance supply and buybacks, burns, and liquidity locks.
There is only one goal for all of the proposed changes according to the proposal:
“… to incentivize long-term participation in the Sushi ecosystem while reducing the number of extractive participants.”
