[xSUSHI] Collateral Onboarding Risk Evaluation

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  1. Summary Proposed Risk Parameters
  2. Overview
  3. Metrics and Analysis
  4. Risk Parameters

Summary Proposed Risk Parameters

Stability Fee: 2%
Liquidation Ratio: 175%
Debt Ceiling: 30m
DC-IAM gap: 5m
DC-IAM ttl: 8h
Cut: 0.99
Step: 90 seconds
Buf: 1.30
Cusp: 0.4
Tail: 140 minutes
Chip: 0.1%
Tip: 300 DAI
Ilk.chop: 13%
Tolerance: 0.5
Ilk.hole: 5m DAI
Dust: 10.000 DAI

Note that the Dust parameter for most vault types may be updated in a poll this week (per this signal request). If the vote fails, this vault type will be onboarded with 5,000 DAI Dust instead.

Overview

Protocol Summary

Sushiswap is a fork of Uniswap v2 with few slight changes such as introduction of governance token and its tokenomics. At the time - late August 2020, Uniswap did not have a governance token which could be rewarded for “liquidity mining” and incentivisation of protocol usage; this instance enabled opportunity for “vampire mining”, which aimed to shift current asset liquidity used in Uniswap to the Sushiswap - the event was seen as greatly successful.

Initial main developer known as Chef Nomi pulled a “rug pull” on the community where he withdrawn his SUSHI/ETH liquidity and cashing it out for ether; the situation was later resolved with the help of Sam Bankman-Fried who managed to return the protocol to the community, via establishing a multi-sig with well-known crypto community individuals as signers, Chef Nomi also returned the funds to the projects treasury.

Sushiswap as fork of Uniswap is using the same automated market maker (AMM) methodology with the x*y=k formula to quote prices. The model relies on market depth being constructed from the pooled liquidity and market agents making swaps with it, where price slippage is relevant to the swap order size and the size of the pooled liquidity. Liquidity providers known as LPs are earning trading fees and are subject to “liquidity mining” rewards from the protocol, but are exposed to “impermanent loss” which is loss which can occur after the pooled assets fluctuate in price relative to the value of asset if they would not be deployed into the pool at all. In general, the accrued fees in combination with liquidity rewards often completely offset the impermanent loss.

The main difference between the two protocols is that Sushiswap distributed accrued protocol revenue from 0.3% protocol trading fees between LPs (0.25%) and xSUSHI token holders (0.05%). xSUSHI is received after depositing SUSHI into a pool called SushiBar; a way to distribute a portion of accrued revenue to token holders. In addition Sushiswap is continuously rewarding LPs with a liquidity mining program, where in addition to collected trading fees, suppliers are rewarded with the protocol token SUSHI.

Sushiswap governance uses signal voting, where votes are in the form of SushiPowah, which is a voting metric and works as followed; each SUSHI in the SUSHI-ETH pool is worth 2 SushiPowah and each SUSHI held via xSUSHI is worth 1 SushiPowah. Votes are managed on snapshot.page, quorum of at least 5 million SushiPowah is required and the multisig signers mentioned previously implement the changes into the protocol.

Metrics and Analysis

Trading volume on CEX & non-custodial venues

While xSUSHI has limited direct trading volumes, it can be exchanged freely for underlying SUSHI tokens via the Sushibar staking contract. This means any SUSHI trading volumes and exchange integrations add to xSUSHI’s overall liquidity as well.

SUSHI has gained the most volume against assets such as USDT, WETH, and BTC. The exchanges that have accrued the most trading volume are CEXs such as: Binance, Huobi, Coinbase and FTX.

Snapshot of top trading volume for SUSHI pairs on 10 June, 2021:

Exchange Pair Volume (24h)
Binance SUSHI/USDT $52,700,465
Huobi SUSHI/USDT $37,796,929
Sushiswap SUSHI/WETH $26,102,313
Coinbase SUSHI/USD $14,005,418
FTX SUSHI/USD $9,959,855
Binance SUSHI/BTC $7,801,029
Coinbase SUSHI/BTC $5,492,945
Binance SUSHI/BUSD $5,207,137
FTX SUSHI/USDT $4,928,027
Coinbase SUSHI/EUR $2,779,595

Source of data: Messari

With the exception of Sushiswap, other DEXs, such as Uniswap, have considerably lower volumes for SUSHI trading pairs. The reason why most SUSHI volume on DEXs happen on Sushiswap is due to high liquidity incentives associated with the SUSHI token on the Sushiswap platform.

DEX trading volume for SUSHI:

Source of data: Block Analitica

We see a similar trend with respect to AMM liquidity for the SUSHI token on different DEXs. The vast majority of liquidity for SUSHI can be found on Sushiswap, compared to Uniswap and other decentralised exchanges. This is also due to the liquidity incentives for the SUSHI token on the Sushiswap platform.

Total amount of SUSHI (denominated in MUSD) deposited on non-custodial venues:

Source of data: Block Analitica

Token Distribution & Issuance Schedule

SUSHI tokens are distributed according to a declining issuance schedule. The rate of token emissions will steadily decline as token supply approaches the maximum cap of 250 million SUSHI. The current circulating supply is 172 million SUSHI.

The Sushiswap multisig receives 10% of all SUSHI tokens minted for liquidity incentives, and over time this has built up to a reserve of ~20 million SUSHI tokens. These can be used or sold at the discretion of governance to fund development or other priorities. The multisig also controls another ~30 million SUSHI that is being held in reserve for previously approved vesting of liquidity incentives. These are scheduled to be released to past liquidity providers over the next 5 months via a manual vesting mechanism.

Source: SUSHI Etherscan

Source: xSUSHI Etherscan

The chart below shows the emissions schedule from launch out through year 4, when substantially all of the supply will have been distributed.

Source: Messari

Token Deposits on Trading Venues and DeFi Exposure

Most centralized exchange platforms offer trading in SUSHI tokens rather than xSUSHI, but we can consider these to be equivalent as SUSHI can be wrapped or unwrapped to xSUSHI on demand. Centralized exchanges offering SUSHI trading include Binance, Bitfinex, Huobi, Coinbase, Kraken, and Gemini plus many others.

SUSHI and xSUSHI tokens are offered on most decentralized exchanges as well, but due to high liquidity incentives the overwhelming majority of DEX liquidity is on Sushiswap itself.

xSUSHI is integrated with several other defi platforms, including lending and borrowing via Aave, Cream Finance and Unit Protocol. Aave in particular has seen high usage of xSUSHI, with over $150 million in xSUSHI deposited as collateral currently.

Approximately 84% of circulating supply of SUSHI tokens are held on exchanges. The amount of SUSHI on SushiSwap represents 79% of the total circulating supply. This is primarily due to SUSHI being the native token of the SushiSwap platform.

Tokens on exchanges (SUSHI)

Exchange Balance
SushiSwap 148,885,621
Binance 13,860,500
Coinbase 11,562,779
Huobi 6,805,754
OKEx 1,727,262
Gemini 1,433,820
Bitfinex 1,388,624
Gate.io 425,606
KuCoin 338,680
AnySwap 270,257
FTX 234,624
Total 186,933,527
out of circulating supply 83.61%
out of total supply 74.77%

Source of data: Nansen and CoinGecko

Tokens on exchanges (xSUSHI)

As previously stated, the xSUSHI token has limited direct trading volumes. Approximately 18% of total circulating supply is being held on exchanges. Binance, SushiSwap, and Almeda OTC are the largest holders, where Binance holds circa 86% of all xSUSHI tokens on exchanges. However, since xSUSHI can be exchanged freely for underlying SUSHI via the Sushibar staking contract, SUSHI trading activity adds to xSUSHI’s overall liquidity.

Exchange Balance
Binance 10,216,925
SushiSwap 1,614,390
Almeda OTC 20,000
Total 11,851,315
out of circulating supply 18.54%
out of total supply 18.79%

Source of data: Nansen and CoinGecko

Downside Risk

SUSHI has faced much larger and more frequent drawdowns than ETH over the past months since Sushiswap’s inception. Note that this period covers only since late August, and SUSHI’s performance during a more severe drawdown on the scale of March 12 2020 is still untested.

Source: Coinmarketcap, May 2021

Historical Fee Returns

xSUSHI stakers receive earnings from the 0.05% protocol portion of swap fees. These earnings can act as a price support for xSUSHI token price, as trading volumes (and therefore xSUSHI earnings) will tend to increase during periods of high volatility when SUSHI token price could otherwise be falling. The chart below shows the total funds staked in xSUSHI versus Sushiswap trade volume and annualized staking yield. Generally it has trended between 5-10% APY, with a brief spike to ~30% during the May downturn.

Source: Sushiswap.vision / Coingecko, June 2021

Risk Premium to Debt Exposure

Source: Maker Risk Dashboard | Block Analitica

Summary of Notable Risks

  • Governance risk: Because Sushiswap uses off chain signal voting implemented through a multisig, SUSHI/xSUSHI lack direct control over protocol cashflows, operations, or treasury reserves. The multisig requires agreement from 6 of 9 signers (all well known individuals) to execute transactions so governance risk is considered low, but potentially higher than other supported defi protocols.
  • xSUSHI (and SUSHI) token value depends on Sushiswap exchange performance. Competition with Uniswap, Curve and others may impact Sushiswap’s market share and token price.
  • Sushiswap currently pays out 100% of fee earnings to xSUSHI staking, but this amount could be reduced by governance. Lower yield could make xSUSHI less economical for vault users.
  • SUSHI token liquidity is heavily incentivized on Sushiswap, and any reductions in incentives (considered unlikely) would reduce assets available for liquidations and potentially increase volatility.
  • A large share of the SUSHI token supply (including xSUSHI) is supplied as collateral to lending markets such as Unit protocol and Aave. This increases risk of sharp falls due to liquidation cascades.
  • Smart contract risk: Staking SUSHI in the SushiBar smart contract can lead to loss of funds in the event of a smart contract bug, malicious attack, or exploit.
  • Volatility risk: Because of the way staking rewards are generated in Sushibar, the price of xSUSHI will always be a function of the SUSHI price. Hence, high price volatility of SUSHI will lead to high volatility in xSUSHI.

Proposed Risk Parameters

Stability Fee: 2%
Liquidation Ratio: 175%
Debt Ceiling: 30m
DC-IAM gap: 5m
DC-IAM ttl: 8h
Cut: 0.99
Step: 90 seconds
Buf: 1.30
Cusp: 0.4
Tail: 140 minutes
Chip: 0.1%
Tip: 300 DAI
Ilk.chop: 13%
Tolerance: 0.5
Ilk.hole: 5m DAI
Dust: 10.000 DAI

Note that the Dust parameter for most vault types may be updated in a poll this week (per this signal request). If the vote fails, this vault type will be onboarded with 5,000 DAI Dust instead.

We used the model from the Collateral Risk Assessment Guide here. A link to our model specification with inputs and outputs can be found here. Data for graphics included in this report can be found here.

Lead Researcher: @monet-supply

Sources:

5 Likes

About time Sushi was onboarded. This will definitely take off.