It’s been a few years since Sushiswap, aka sushi, was created in the burgeoning yet tumultuous world of DEFI. Today its an established brand and a go to place for people willing to swap coins on multiple chains including Ethereum and L2’s. It owes its reputation to a strong core developer team and an enthusiastic community of afficionados who have helped this protocol to stay afloat even during the times of storms both internally and externally.
Today, and especially at the crux of a bear market, sushi is facing a challenge of viability as liquidity gets more and more expensive and competition for volume gets ever more fierce. Fortunately, sushi has a new CEO whose mandate is just that. At the helms of sushi since last month, Jared Grey is aiming to make the most out of the talent in his team of developers to help it stay viable.
In this short thread, I will try to paint a picture of the current economic situation in which sushi finds itself in order to illustrate the challenges that are lying ahead.
Net revenue (top line) can be a good metric to track the health of a business. Although it’s not as informative as net income (bottom line), it can be a good proxy for income if we have an estimation of the operational costs of the business.
At sushi, ignoring tiny business units such as Kashi, miso, etc, revenue comes from two sources, trades(swaps) and emissions. By emissions I mean minting new SUSHI out of thin air; call it inflation on the sushi token. The sushi protocol’s smart contracts have been written such that a set amount of SUSHI is minted at every block. There are roughly 245 Million SUSHI’s out there at the time of writing, and the number would be capped at 250 Millions once it reaches there. That is if the protocol doesn’t vote to augment it.
While Sushi’s gross revenue appears to be handsome; 0.3% of the value of all swaps and 100% of the emissions, sushi’s Net revenue is much more meager; only 0.005% of the trade volume and 10% of the emissions. But these are percentages, show me the money! Tiny percentages in a large pie can still amount to a lot of pie. So, let’s see how big these two pies are!
The purpose of emissions is two-fold. 90% of emissions turn into rewards for people providing liquidity to reward-enabled (Onsen) pools. Without emissions, the liquidity providers will have less ROI on sushi. The following charts testify to the shrinking value of the rewards in USD in the past 11 months and its not just the bear market that is to blame. Although I feel like blaming it anyways for 1001 other things it has done to us! But in reality, it’s only partly behind the shrinkage of the rewards, the other factor is the sushi protocol itself winding down the rewards schedule. After all, there are not infinite number of SUSHI’s that can be minted.
In the past six months, SUSHI has been minted at a speed of 14,732 SUSHI’s per day. Given that there are only 4,240,000 SUSHI’s left to emit before reaching cap, we have only 287 days left before minting stops, assuming we mint at the same speed going forward.
The swap volume in 2022 doesn’t look better than the emissions. But this time I have only the bear market to blame cause nothing has changed on sushi. They have even introduced the incredible Xswap ,which is a crosschain bridge, and it is supposed to drive more demand for the swap. The average daily volume in the pas 4 months has stabilized around $30 M.
If sushi is to stay viable as a business, it must print profit, its net revenue has to be larger than its operational expenses. Unfortunately there are no on-chain data about their operational expenses, but It’s not the case for the net revenue. So, we’re going to use that.
For simplicity, I am going to assume that market conditions will remain the same for the next 280 days (oh no, God please!). That would translate into a stable sushi price and stable trade volume.
Sushi’s net revenue can be summarized into this formula.
Treasury revenue from trade + Treasury revenue from emissions — the cost of emissions
Over the past six months, on average per day, the treasury has made $1948 from emissions and $2207 from trading activity.
Since emission revenue is only around for 287 days. Given the assumption that the markets won’t rebound, sushi is looking at a total net revenue of $1,192,485.
Wait, what happened to the dilution!
The following simple and naïve calculation yields a price dilution of 2% as a result of new emissions. This means an estimated 2% will be shaved off of the dollar value of every SUSHI holder’s balance, including sushi treasury itself.
At the time of writing, sushi treasury is worth $19,202,369. Thus the adverse effect of dilution on treasury will be $345,896.
So the net revenue of sushi will finally be $846,589 for a period of 287 days, i.e. 9 months. We don’t need to have the exact operational costs to determine that this is not a viable operation.
Is sushi doomed?
Not so soon, and only because of the treasury that can absorb the loss in the short run. But if the markets don’t get back up or trade volume doesn’t look up or sushi doesn’t find another source of revenue, it will only be a matter of months before sushi disappears unfortunately :(
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Charts and data are courtesy of Flipside Crypto.