How SUSHI Works

SUSHI is the governance token of SushiSwap, a decentralized exchange (DEX) that allows users to trade a wide variety of cryptocurrencies directly from their wallets. Like other decentralized exchanges, SushiSwap operates without the need for a central authority, enabling peer-to-peer transactions powered by smart contracts. Understanding how SUSHI works requires delving into the role of liquidity providers, the benefits of governance, and the tokenomics that support the SushiSwap ecosystem.

Role of Liquidity Providers

At the core of SushiSwap operations are liquidity providers (LPs). When users want to trade assets on SushiSwap, they do so with the help of liquidity pools. To create these pools, liquidity providers deposit pairs of tokens into the exchange’s smart contract. In return, LPs receive Liquidity Pool (LP) tokens that represent their share in the pool.

LPs earn a portion of the transaction fees generated on SushiSwap, which incentivizes them to provide liquidity. Every trade executed on SushiSwap carries a small fee, and a percentage of this fee is distributed to LPs as a reward for their contribution to the liquidity pool. This forms the backbone of how the SushiSwap decentralized exchange functions efficiently without relying on centralized order books.

The SUSHI Token and Staking

Unlike some other DEX platforms, SushiSwap introduced the SUSHI token for governance and staking purposes. Initially, liquidity providers were also rewarded with SUSHI tokens on top of the standard transaction fees. SUSHI holders can participate in governance decisions that shape the future of the SushiSwap platform, such as deciding on which new tokens to list or proposing updates to the platform.

Additionally, SushiSwap allows users to stake their SUSHI tokens in a system referred to as “SushiBar.” By staking their SUSHI, holders can earn a portion of the platform’s fees, which are converted into additional SUSHI. This introduces an incentive for long-term holding and participation in the governance of the platform.

Tokenomics

One key to understanding how SUSHI works is its tokenomics. The tokenomics of SUSHI are designed with both inflationary and deflationary mechanisms. Originally, there was no max supply for SUSHI, and new tokens were continuously minted to reward liquidity providers. However, token minting has been adjusted over time to ensure it remains sustainable for the platform’s long-term growth.

The deflationary aspect comes into play through SushiSwap’s token buybacks and burns. A portion of the transaction fees is used to buy back SUSHI from the open market and burn them, permanently removing the tokens from circulation. This mechanism is intended to control inflation while rewarding both liquidity providers and governance participants with ongoing benefits.