Amidst the growing chaos within the DeFi ecosystem, a relatively unknown platform called SushiSwap launched in August 2020. A series of shocking events unfolded in the next few weeks where people saw the dark side of DeFi. We are fortunate that there was no exit scam and users did not lose funds.
There were red flags in multiple stages of the progress of SushiSwap. In this article, we will explain how to identify such red flags of riskier projects. We also give you our opinion on how one needs to approach DeFi.
What is SushiSwap?
SushiSwap is a fork of Uniswap. It brought in the concept of community-driven Automated Market Making (AMM). The protocol allocates 0.25% directly to the liquidity provider (LP) and converts another 0.05% to SUSHI and distributes it to the SUSHI token holders. SUSHI tokens can only be minted by supplying liquidity to SushiSwap pools. Since its inception, the anonymous founder (@NomiChef) promised that SushiSwap will have a fair distribution.
Red-Flag: SushiSwap had a big red flag during its launch. Its founder, @NomiChef, was anonymous. His Twitter account revealed no historical background that can show his credibility. This is in huge contrast to popular developers like Andre Cronje.
Community-driven
SushiSwap is decentralized and community-driven. To ensure the long-term viability of the project, 10% of every SUSHI minted is set aside to fund development and future iterations. This includes smart contract upgrades and frontend support for ease of use. There is no VC, only the community fund.
8/ To ensure the long-term viability of the project, 10% of every $SUSHI minted will be set aside to fund the development & future iterations including smart contract upgrade and frontend support for the ease of use. No VC, only community fund.https://t.co/UPWgfhT3kD
— Chef Nomi #SushiSwap (@NomiChef) August 26, 2020
Distribution
Once the SUSHI distribution started, people started to harvest SUSHI. They put it in the SUSHI-ETH Uniswap pool and staked the LP tokens in the MasterChef contract.
Red-Flag: SushiSwap made it very clear that this is an experimental project. Their smart contracts were not audited.
High profile pools
SushiSwap was an instant hit. Projects like Band Protocol added liquidity. Band Protocol was the first Uniswap pool to have more than 50% of its total LP tokens staked. This was worth $1.3 million worth of liquidity.
Note: Blindly following high profile moves can often be misleading. Often, they have a different agenda. Do your own research.
Immediate performance
By end of August, SushiSwap had a total value locked (TVL) of ~$150 million.
SushiSwap promised a 10X incentive for the first 100,000 blocks. SushiSwap also mentioned that such yields will only live for roughly two weeks.
Red Flag: Such high returns are not sustainable. Someone will lose money for others to gain. In yield farming, the early gainers dump on the later farmers. So, by the time an experiment becomes a real product, the price has already been dumped.
Audit requests
At this point, SushiSwap requested an audit.
FTX farming
Enter FTX. By this time, FTX became the largest SUSHI farmer. It was contributing ~ $31m in liquidity.
Red-Flag: There were concerns that FTX was farming SUSHI to control Sushiswap.
6/ So this where it gets interesting. The largest $SUSHI farmer is contributing $31m in liquidity to farm. It’s practically undisputed now that this is @FTX_Official farming. Is FTX farming $SUSHI in anticipation of obtaining a controlling interest in Sushiswap and expanding
— DeFiGod (@DeFiGod1) August 30, 2020
Off-chain voting
Off-chain voting started a few days after the initial launch.
Red-Flag: It is to be mentioned that, until now, SUSHI did not have governance properties. It behaved as a moneymaking coin with no proper utility.
Quantstamp audit result
Quantstamp published its audit result in early September. There were no critical or high severity issues found.
The FTX proposal
FTX proposed a bridge between Ethereum and Solana. The fundamentals of this proposal were:
- The Sushi community builds out support for Sushiswap on Solana
- Pay Sushi rewards to both Ethereum and Solana/Serum based Sushiswap
A detailed document can be found here.
@NomiChef expressed interest in the proposal. While interoperability looked like the right way forward, the involvement of FTX raised serious concerns on who is in control.
Transfer of admin control
Suddenly, @NomiChef announced the transfer of admin control of MasterChef and dev share address to a multisig address behind a timelock.
Check out our video covering the incident.
Sell of developer fund
This was the ultimate shock! @NomiChef sold his allocation of SUSHI from the developer fund! There was huge outrage and talks about an exit scam. People blamed @NomiChef for losing trust in his token.
@NomiChef justified the sale by saying that he stopped caring about price and will focus on the technicality of the admin migration. He compared the situation with what Charlie Lee did with Litecoin. @NomiChef thought that his contributions justified the sale. He said, “People asked if I exited scam. I did not. I am still here. I will continue to participate in the discussion. I will help with the technical part. I will help ensure we have a successful migration.”
Our opinion
DeFi is a new space. Most of the projects are highly experimental. The initial space had been set up by builders who designed the base DeFi protocols over a long period. Now we will see a wave of instruments that are forks of the original DeFi products. Many of such new products are money grabs. Beware!
We believe that the entire episode was handled with extreme unprofessionalism. The founder was arrogant and dumped on the users. However, it is also a fact that he kept the users informed about the risks involved. It is such users who chose to sign for SushiSwap knowing the risks surrounding the project. Our greed to earn quick money has provided the stimulus to situations like this. Our lack of understanding of how such protocols work makes it worse.
Quote: During the launch, Sushi told users, “We trust that $SUSHI stakers will DYOR, read the code, check contract deployments, and make sure they understand the risks before putting any LP tokens at stake.” We have to understand that lack of regulations makes it easier for fraudsters to make exit scams. We were lucky this time!
Things you should take care of before investing in a DeFi project
- Do not fall for high yield. It is not sustainable.
- Understand what is an experiment and what is a real product.
- Not all DeFi tokens hold value. Check if it has a utility and if the product is innovating.
- Any project with anonymous founders has a risk.
- Do not invest in unaudited protocols.
- Projects should follow the Standards of Decentralized Governance. No governance properties make a DeFi token half-baked. For example, @NomiChef showcased SushiSwap as community-driven. However, in the initial days, it achieved consensus via Twitter!
Conclusion
DeFi is a risky game. Play it properly. Read and understand all parameters. Get rid of greed and always do a risk assessment before investing. Know your limitations. Have strict investing guidelines. DeFi is the future, and it will grow. It is us who will decide what is the right path it should take.
Check out our report on an actual DeFi exit scam that happened recently.
Reference: SushiSwap Website
Disclaimer
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