SushiSwap CEO Jared Gray presented a proposal on Dec. 30 to modify the tokenomics of the SUSHI token in an effort to relaunch the protocol amid a liquidity crunch.
On December 6, Gray unleashed a furor in the SUSHI community after announcing that the project cash had a trail of only 1.5 years. At the time, Gray propose that 100% of the fees collected by SushiSwap be diverted to Kanpai, the project’s treasury, for one year or until new tokenomics are introduced.
The decentralized exchange (DEX) urged the fee diversion proposal, suffer a loss of $30 million over the past 12 months on liquidity provider (LP) incentives. According to Gray, this proves that SushiSwap’s incentive mechanism is “unsustainable” and needs realignment.
Indeed, current tokenomics disproportionately distributes its royalty income and show rewards to non-LPs, according to the formal tokenomics redesign proposal. Additionally, since less than 2% of users who invest xSUSHI provide liquidity in any pool, the proposal noted that:
“Helping build liquidity in Sushi pools requires realigning token mechanisms that properly align LP activity with the most rewards and value accumulation.”
Grey’s proposed tokenomics aims to reward liquidity growth through a “holistic and sustainable reward mechanism that scales with volume and fees.” In addition to increasing liquidity, the new tokenomics model seeks to create more utilities for SUSHI and “promote maximum value for all stakeholders”.
Proposed changes in SushiSwap tokenomics
The new tokenomics model will introduce time-locked levels for emission-based rewards, a token-burning mechanism, and locked-in liquidity for price support.
The most significant proposed change under the new model is that staked SUSHI (xSUSHI) will no longer receive any fee revenue share. Instead, under the new proposal, xSUSHI will only receive rewards based on shows paid for in SUSHI.
Show-based rewards will be based on timelock tiers – the longer the timelock, the higher the rewards. While users are allowed to withdraw their collateral before the hourly blocks expire, premature withdrawals will result in forfeiture of rewards.
Additionally, LPs will receive a 0.05% swap fee revenue share, with the highest shares going to the liquidity pools with the highest volumes. This will help reward LPs in proportion to their contribution to liquidity.
LPs can also choose to lock in their liquidity for additional show-based rewards, but they risk losing the rewards if they withdraw their tokens prematurely.
Additionally, SushiSwap will use a variable percentage of the swap fee of 0.05% to redeem SUSHI and burn it. Token burning is the process of removing tokens from circulating supply by sending them to an address from which they become unrecoverable to anyone.
Lost rewards are burned when xSUSHI and LPs prematurely remove their warranty from their time locks. According to Gray, since time lock rewards will be paid after maturity while burn will occur in real time in the new model when a large amount of collateral is prematurely unlocked, this will have a significant deflationary effect on the SUSHI offer.
The DEX will also use a portion of the 0.05% swap fee to lock in liquidity for price support, the new tokenomics proposal says.
Finally, to reduce inflation, the DEX will raise issuances to 1-3% annual percentage yield (APY) for the SUSHI token. The goal is to balance supply with redemptions, burns and liquidity lock-ups.
According to the proposal, all the changes have a single objective:
“…encouraging long-term participation in the Sushi ecosystem while reducing the number of extractive participants.”