Decentralized exchanges are the latest trend in decentralized finance (DeFi). At the moment, there are two decentralized exchanges fighting for the top spot – Uniswap and Sushiswap.
Uniswap is the leading exchange, but Sushiswap – a fork of Uniswap – launched in September and quickly climbed to become the leading competitor of Uniswap.
This article will examine the differences between the two and offer insight on who will win the battle to become the top decentralized exchange.
Uniswap vs Sushiswap
Uniswap is a decentralized exchange launched in November 2018. The exchange is on the Ethereum blockchain and relies on a smart contract to regulate all exchange transactions.
In simple terms, anyone can list any ERC-20 token on Uniswap by adding a certain amount of the token and Ether to the smart contract.
This amount is then locked on the smart contract and the price is determined by a system called an automatic market maker (AMM). The AMM gives a corresponding price based on the current amount available in the smart contract, which typically equals the price on centralized exchanges because arbitrageurs stabilize the price.
It’s a great system and worked fine for two years. The big incentive on Uniswap was something called liquidity mining, which is simply locking in Ether, or other tokens, into the smart contract in exchange for an ERC-20 token reward.
The reward for liquidity mining is often a native token of the exchange.
Anyway, SushiSwap launched as a fork of Uniswap in September 2020 with one major difference.
Massive rewards for liquidity mining.
Those rewards were, of course, a Sushiswap native token called Sushi Token. This higher liquidity mining reward caused a massive drop in liquidity on Uniswap as users began liquidity mining on Sushiswap. And this brings up a fundamental issue with decentralized exchanges.
Users Follow Rewards
Basically, users go where they get the most rewards for staking and liquidity mining. Sushiswap knew this and offered much higher rewards than Uniswap.
Naturally, Uniswap followed suit and increased their rewards to prevent a further loss of users. However, it does bring up an interesting point:
A decentralized exchange is only as good as the rewards they offer liquidity miners.
It’s that simple. As Sushiswap has shown, a decentralized exchange that offers higher rewards will attract more users to the exchange.
The Problem with Sushiswap
Sushiswap is the second most popular decentralized exchange, but it does have one glaring problem.
The founders are anonymous. This is generally viewed as a bad sign for a decentralized exchange because the odds of the founders disappearing with all the exchange’s money greatly increase if they are private.
In fact, many in the cryptocurrency community thought Sushiswap would disappear shortly after launch because of all the liquidity that flowed into the exchange. Fortunately, Sushiswap did not disappear after their meteoric rise to popularity.
However, it is still a concern placing money on a decentralized exchange with anonymous owners.
Uniswap, on the other hand, has an owner that is known to the public. This is by no means a guarantee that the exchange will still exist in another year. But it does offer some peace of mind because most people do not want to have their name associated with some sort of scam.
Additionally, Hayden Adams has owned Uniswap for the past two years and it currently has over a billion dollars locked into it. If he wanted to make a run with the money, then he likely would have done so sooner.
Who will win: Uniswap or Sushiswap?
In our opinion, it is pretty clear who will win: Uniswap.
It has a few advantages being the first to market and a public owner. We know, those two advantages do not sound particularly large, but in an industry as shady as cryptocurrency it’s reassuring to see something last two ye ars and have a public face to the business.
It’s also important to note that Uniswap received funding from venture capital firms that include Andreessen Horowitz, Union Square Ventures LLC, and Paradigm Venture Capital.
Venture capital firms are willing and able to dump money into an investment to turn a profit. Sushiswap does not have any of that.
As mentioned previously, Sushiswap is a fork of Uniswap with an anonymous founder. The code is not particularly complex, either. Hayden Adams has even stated that the code differences between Uniswap and Sushiswap could have been written in a single day by an average developer.
Due to that, it looks like Sushiswap will be a flash in the pan of decentralized exchanges. Sure, Sushiswap will be a large flash in the decentralized exchange pan, but nothing about it indicates that it has any staying power. Especially considering that high rewards for staking cannot be run forever.
Are there any other decentralized exchanges?
Of course, there are dozens of other decentralized exchanges in operation. But none of the exchanges are anywhere close to Sushiswap or Uniswap in popularity.
Other popular decentralized exchanges include:
These exchanges all offer something unique, but they are still decentralized exchanges at the end of the day.
Will decentralized exchanges overtake centralized exchanges?
We did discuss decentralized exchanges vs other decentralized exchanges. However, the real battle is between decentralized exchanges and centralized exchanges.
Now, we do like the idea of decentralized exchanges, but they do have some major problems they must overcome before overtaking centralized exchanges.
The first problem is that decentralized exchanges are hard to use for those that are not too familiar with technology. Sure, decentralized exchanges are not super difficult, but Coinbase and other centralized exchanges are extremely simple to use.
This problem will likely be solved as younger generations begin trading more cryptocurrency. As you probably have figured out, younger generations are much more tech savvy than older generations. They just do not have nearly as much money.
The other problem, and a bigger problem, is that the decentralization of a cryptocurrency exchange scares people off. Most people just want something simple where they can send fiat currency and receive cryptocurrency. Additionally, most people trust bigger companies rather than something decentralized.
Again, this does not really make sense because a decentralized exchange is much more trustworthy than a centralized one because there is no owner. This problem will likely resolve itself as more and more people become increasingly distrustful of banks and other centralized financial institutions.
In other words, it’s just growing pains due to this being a very new technology. Consumers will warm up to the idea and see the benefits of a decentralized exchange as time progresses.
We hope we did a good job explaining some of the differences in the battle between Sushiswap and Uniswap as well as the overall idea of decentralized exchanges.
The battle between Uniswap and Sushiswap is not nearly as complex as many in DeFi make it out to be. It really comes down to Sushiswap forking Uniswap and then offering much higher staking rewards to attract more liquidity.
It’s our opinion that Uniswap will survive this battle due to being the first to market and the anonymous nature of Sushiswap. But Sushiswap has shown that it is possible for any exchange to gain massive liquidity by offering massing staking rewards.