SushiSwap CEO Jared Gray introduced a proposal on December 30th to change the tokennomics of the SUSHI token in order to revive the protocol amid the liquidity crisis.
On December 6th, Gray caused an uproar in the SUSHI community after announcing that the project had only 1.5 years of funding. At the time, Gray offered to divert his 100% of the fees earned by SushiSwap to his Kanpai, which funded the project, for his year or until the new tokennomics was introduced.
Decentralized exchanges (DEX) encourage proposals to divert fees, suffer a loss of $30 million Liquidity Provider (LP) incentives for the last 12 months. According to Gray, this proves his SushiSwap incentives his mechanism is “unsustainable” and needs restructuring.
This is because the current tokennomics disproportionately distributes fee income and emission rewards to non-LPs. Tokennomics Redesign ProposalAdditionally, since less than 2% of users who stake xSUSHI provide liquidity in any pool, the proposal states:
“In order to strengthen the liquidity of Sushi’s pool, we need to recalibrate the mechanics of the token to better align LP activity with the most rewards and value generation.”
Gray’s proposed tokennomics 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 aims to create more utility for SUSHI and “drive maximum value for all stakeholders.”
Proposed changes to SushiSwap Tokenomics
The new tokennomics model introduces a time-locked layer for emissions-based rewards, a token burn mechanism, and locked liquidity for price support.
The most significant change proposed under the new model is that staked SUSHI (xSUSHI) will no longer receive a portion of the commission revenue. Instead, according to the new proposal, xSUSHI will only receive emissions-based rewards paid with his SUSHI.
Emission-based rewards are based on your time lock tier, the longer the time lock, the higher the reward. Users can withdraw their collateral before the maturity of the timelock, but premature withdrawal will lead to forfeiture of rewards.
Additionally, LPs will receive a portion of the swap fee revenue of 0.05%, with the highest share going to the liquidity pool with the highest volume. This helps reward LPs in proportion to their contribution to liquidity.
LPs can also choose to lock liquidity for additional emission-based rewards, but withdrawing their tokens prematurely will result in a loss of rewards.
In addition, SushiSwap will buy back and burn SUSHI using a variable percentage of swap fee of 0.05%. Burning tokens refers to removing a token from the circulating supply by sending it to an address.
Forfeited rewards will be incinerated if xSUSHI and LP prematurely withdraw collateral from Time Lock. According to Gray, time-locked rewards are paid after maturity, and if large amounts of collateral are unstaked prematurely, burns occur in real time in the new model, creating a large deflationary effect on the supply of SUSHI. is.
The DEX will also use a portion of the 0.05% swap fee to ensure liquidity for price support, the new Tokennomics proposal states.
Finally, to keep inflation under control, the DEX will have emissions between 1-3% of the SUSHI token’s Annual Percentage Yield (APY). The objective is to balance supply with buybacks, burns, and liquidity locks.
According to the proposal, all changes aim at one goal.
“…encouraging long-term participation in the sushi ecosystem while reducing the number of selective participants.”