Is ‘Vampire Mining’ the Next Big Thing for DeFi?

Uniswap is the undisputed heavyweight champion of token swapping, with the lion’s share of the market and over $500 million locked up in liquidity. While it is far superior to a centralized exchange, it does have its own inherent problems, such as fake token listings, flash swaps, and market manipulation. The latest offering in the world of token swapping is SushiSwap, which touts itself as “an evolution of Uniswap with SUSHI tokenomics.” It leverages liquidity from Uniswap in order to generate another zero value governance token, and yield farmers are lapping it up.

Sushi Farming Frenzy

Liquidity farmers have something else to play with now, as a Uniswap fork called SushiSwap has been gaining momentum. SUSHI governance tokens can be earned on the platform by staking the Uniswap v2 liquidity pool tokens. It has been termed ‘vampire mining’ by some industry observers as it leeches liquidity from Uniswap. Ethereum developer Hayden Adams quipped:

2017: Ethereum killers
2020: Uniswap killers

— Hayden Adams 🦄 (@haydenzadams) August 28, 2020

On Uniswap, liquidity providers only earn the pool’s trading fees when they are actively providing liquidity. However, these rewards can quickly get diluted when whales also join the pools with their heavy bags. SushiSwap claims to have evolved this system by offering SUSHI tokens, which entitles users to continue earning a portion of the protocol’s fee regardless of whether liquidity is still being provided. For the first two weeks, 10 times the amount, or 1,000 SUSHI tokens, are rewarded per block, with the SUSHI/ETH pool receiving an added multiplier of two.

A fee of 0.25% goes directly to the active liquidity providers, while the remaining 0.05% gets converted back to SUSHI and distributed to token holders. The plan is to take the liquidity staked in the interface and migrate it to a native automated market maker around two weeks after launch, according to the official blog, which added:

Once the migration is done, the liquidity converted will be fueling the first sets of SushiSwap pools, and will bring the protocol into operation immediately. The stakers don’t need to do anything and will continue to receive SUSHI token rewards from providing liquidity going forward.

Ten percent of every SUSHI distribution will be set aside for development and future iterations of the protocol, which includes security audits. At the moment, the protocol is unaudited and somewhat risky, though there is the possibility of a Quantstamp audit in the near future. https://twitter.com/SushiSwap/status/1299474746615066624 Following the shenanigans with Yam Finance, the crypto community is rightfully wary. The first red flag is a delay on any admin action, which would allow liquidity providers to pull out before any major changes are made. SushiSwap tweeted:

We’ve transferred admin power to timelock contract. Any admin function call from the dev will [be] subject to a 48-hour delay.

Messari researcher Ryan Watkins [@RyanWatkins_] observed that 28% of all Uniswap liquidity has now been migrated to SushiSwap.

28% of all Uniswap liquidity is staked in SushiSwap right now.

At $2.36 SUSHI SushiSwap is paying out ~$15mm in rewards daily = ~13% daily yield

Remember after ~2 weeks all Uniswap LP tokens staked in SushiSwap will automatically migrate to SushiSwap – forking liquidity.

1/ pic.twitter.com/ej9F5fmiQC

— Ryan Watkins (@RyanWatkins_) August 28, 2020

Uniswap.info reports that the current price of a SUSHI token is $2.65, up from basically zero just a day ago. An analytics dashboard on Zippo.io shows that there has been over $300 million already provided as liquidity as the latest DeFi farming frenzy heats up.

DeFi TVL Surges Past $8 Billion

All of this liquidity may have been leeched from Uniswap, but its own TVL has surged by 30% over the past 24 hours. This has had the effect of pushing the total amount of collateral across the entire sector up to a record $8.45 billion, according to DeFi Pulse.

The move has added almost 15%, or over a billion dollars, in crypto collateral over the past 24 hours. TVL in the DeFi sector has more than doubled this month alone while total crypto market capitalization has only managed to gain 10% over the same period. Aave remains at the top of the pile, though its market share has dipped to 18.5% with TVL remaining stable at $1.54 billion. Maker and Curve Finance, in second and third respectively, have not moved much. It is largely down to Uniswap that is driving gains in DeFi at the moment as the vampire mining continues.