SushiSwap’s CEO, Jared Grey, introduced a proposal on Dec. 30 to alter the tokenomics of the SUSHI token in an attempt to revive the protocol amid a liquidity crunch.
On Dec. 6, Grey set off a furor in the SUSHI community after announcing that the project’s treasury had a runway of only 1.5 years. At the time, Grey proposed that 100% of the fees earned 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, incurring a loss of $30 million in the past 12 months on liquidity provider (LP) incentives. According to Grey, this proved that SushiSwap’s incentive mechanism is “unsustainable” and requires realignment.
This is because the current tokenomics disproportionately distributes its fee revenue and emissions rewards to non-LPs, according to the formal tokenomics redesign proposal. In addition, since less than 2% of users who stake xSUSHI provide liquidity in any pool, the proposal noted that:
“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 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-lock tiers for emissions-based rewards, a token burn mechanism, and locked liquidity for price support.
The most significant proposed change under the new model is that staked SUSHI (xSUSHI) will no longer receive any share of the fee revenue. Instead, according to the new proposal, xSUSHI will only receive emissions-based rewards paid in SUSHI.
The emissions-based rewards will be based on time-lock tiers — the longer the time lock, the higher the rewards. While users are allowed to withdraw their collateral before the maturity of the time locks, pre-mature withdrawals will lead to the forfeiture of rewards.
Additionally, LPs will receive a share of the 0.05% swap fees revenue, with the highest shares going to the liquidity pools with the highest volumes. This will help reward LPs in proportion to their contribution towards liquidity.
LPs can also choose to lock their liquidity for additional emissions-based rewards but will stand to lose the rewards if they withdraw their tokens prematurely.
Furthermore, SushiSwap will use a variable percentage of the 0.05% swap fee to buy back SUSHI and burn it. Burning tokens refer to removing tokens from the circulating supply by sending them to an address from where they become irretrievable by anyone.
The forfeited rewards are burned when xSUSHI and LPs withdraw their collateral prematurely from their time locks. According to Grey, since time lock rewards will be paid after maturity while the burn will occur in real-time under the new model when a large amount of collateral is prematurely unstaked, it will have a significant deflationary effect on the supply of SUSHI.
The DEX will also use a portion of the 0.05% swap fees to lock liquidity for price support, the new tokenomics proposal states.
Lastly, to reduce inflation, the DEX will bring emissions to 1-3% annual percentage yield (APY) for the SUSHI token. The aim is to balance supply with the buy-backs, burns, and liquidity locks.
According to the proposal, all of the changes aim toward one goal:
“… incentivize long-term participation in the Sushi ecosystem while reducing the number of extractive participants.”