The decentralised finance (DeFi) space is heating up. We have seen multiple projects breaking through their all-time highs with Synthetics (SNX) and Aave (AAVE) being just two examples. Brian Brooks, the acting head of the U.S. Office of the Comptroller of the Currency (OCC), compared DeFi to "self-driving banks", in his recent opinion piece in the Financial Times.
Projects have also been releasing roadmaps for 2021, like this one from Kain Warwick, founder of SNX. At the same time, we continue to get drabs of information about L2 migrations from major projects like Aave. You can check out our thoughts on L2s and scalability here.
With all that excitement around DeFi, we wanted to take some time and look at Uniswap and Sushiswap. Decentralised exchanges (DEXs) are among the foundational blocks of DeFi's money legos, and these two projects have plenty of interesting things in store in 2021.
Uniswap vs Sushiswap: State of Play
Automated Market Makers (AMMs) are arguably the most crucial DeFi innovation. Over the last 12 months, DEXs facilitated $143 billion in trading volume. Over the previous 30 days that number was around $37 billion.
Uniswap has historically been a dominant player in the DEX space. It has more individual users and greater traction in the broader DeFi ecosystem. However, it's position as a market leader is currently being challenged by Sushiswap. Sushiswap has a tumultuous history but since Chef Nomi's infamous exit from the project, the team and community have been relentlessly focussed on surpassing UniSwap as the dominant DEX.
Since the introduction of its Onsen program, which was meant to bring new liquidity to SushiSwap, Sushi has been capturing a growing share of DEX trading volumes. Over the last seven days, Sushi accounted for 23.7% while Uniswap retained its lead with 45.4%. In September, Sushiswap trading volume was roughly 8% of Uniswap's while that figure is closer to 51% now.
(Source: Dune Analytics)
Trading volumes are important but liquidity is also paramount. Liquidity is popularly measured by the Total Value Locked (TVL) in these protocols. Uniswap had a large lead in September after it launched its token and liquidity mining program. As incentives expired in November, we saw a large migration of funds to Sushiswap. Over the recent weeks, there has been steady TVL growth for both projects, but the gap is narrowing.
(Source: Delphi Digital)
Furthermore, we are seeing protocols completely bypass Uniswap and go straight to Sushiswap to create liquidity for their project. BoringDAO is one example with $500,000 in Sushiswap liquidity and no Uniswap liquidity. Mithril Cash is another. Capital efficiency, measured by volume as a percentage of liquidity, is another metric where we can see Sushiswap emerge to rival Uniswap. From the 3rd of January to the 6th of January, Uniswap and Sushiswap have been recording similar capital efficiency figures. Sushiswap recorded higher figures on the 5th and 6th of January.
Key differences between Uni and Sushi
One of the main differences between Sushiswap and Uniswap is culture. Sushiswap is a community-driven project. It has high community engagement levels, is transparent and openly ambitious about its roadmap, and is led by a pseudonymous team of developers. Uniswap, on the other hand, prefers to stay quiet and build behind closed doors. We know that the v3 is coming but have no details about what it entails. This is often the difference between American and non-American projects.
Uni and Sushi are likely to approach scaling in different ways, with Uniswap implementing Optimistic rollups and Sushiswap likely going with ZK rollups. Over the longer-term, these should converge to some degree, especially as we get close to stage 1.5 of ETH 2.0.
The value accrual mechanism is similar but different. Both protocols generate cash flows through a 0.05% fee on trading volume. In the case of Sushiswap, fees accrue directly to SUSHI stakers. For Uniswap, fees go to the community treasury. Uniswap token holders can vote to turn on the fee switch through the governance process, but not before March 2021.
On valuations, Sushiswap seems somewhat undervalued relative to Uni. Despite catching up with Uniswap when it comes to many fundamental metrics, Sushiswap’s $791 million valuation remains at roughly half of the current $1.53 billion Uniswap valuation.
Uni Versus Sushi in 2021
All we know about Uniswap's roadmap for 2021 is that v3 is coming. The team is focusing on drastically improving the "AMM experience for both swappers and LPs, increasing capital efficiency and flexibility while introducing superior execution." We also know that Uniswap will likely expand to L2 this year.
We have a much greater clarity on the roadmap for Sushiswap. The team is working on countless integrations, partially thanks to its yEarn partnership. This includes cross-chain AMM development with Rune and Polkadot testing Sushiswap on Kusama. BentoBox and Miso are due to launch in 2021. We are also excited about Sushiswap's MIRIN proposal that will enable franchised and exchange-backed pools. In simple terms, this is integration of centralised exchanges with DEXs. The proposal includes plenty of other features like Zaps, Keeper-powered yield rebalancing, etc.
Significant Upside for Uni and Sushi in 2021
It's worth reiterating that we believe that AMM-model powering DEXs is one of the most important DeFi innovations. 2020 was a big year for DEX volumes, and we expect 2021 to be equally ground-breaking.
Uniswap used to be the only major DEX in the space but we believe it's currently a two-horse race. Sushiswap is catching up on volumes, capital efficiency, number of tokens, and is already distributing fees to SUSHI stakers, something Uniswap has failed to do.
That said, Uniswap continues to enjoy its first-mover and early innovator moat. While little is known about Uniswap v3, we fully expect it to change the game. Overall, we view this as one of the rare scenarios where the winner will not take all. We believe both projects are fascinating and have plenty of price upside.