Uniswap’s new UNI token has created a buzz in the DeFi world, with over 13,000 users claiming their tokens within three hours of its launch. This move was in response to SushiSwap’s decision to migrate almost $1 billion of funds from Uniswap through a “vampire mining” attack, which is the migration of an exchange’s funds/liquidity to another source.
This move by SushiSwap essentially sparked one of the more important rivalries in decentralized finance, led by Sam Bankman-Fried, CEO of crypto derivatives exchange FTX. Sam briefly took over SushiSwap from its mastermind, Chef Nomi, and went on to return control of the project to the community and its co-founder, known as Chef Maki. Cointelegraph discussed Uniswap’s response to launching its UNI token with Bankman-Fried, who commented:
“It had a great launch and Uniswap is one of the foundational projects in DeFi. I think the valuation is reasonable compared to other DeFi projects though higher than I would have guessed compared to CeFi exchange tokens. There’s also a lot more supply left to come.”
On the same day that UNI launched, it was listed on more than a dozen exchanges, with Binance being one of the first, listing the token within 90 minutes of its launch, which drove the trading volume to $1.9 billion.
Binance also faced a lot of flak from investors for jumping the gun and also listing SushiSwap’s SUSHI token at launch, which it deemed to be an innovative but risky project. Token issuance has led Uniswap to become the biggest platform by total value locked, currently holding $1.91 billion.
UNI is not just a response to SUSHI
Although at the outset it seemed like Uniswap launching its token was a direct response to SushiSwap’s vampire mining attack, it could also be a strategic move to cash in on the hype around liquidity mining. Cointelegraph discussed this with Stuart Popejoy, co-founder and president of Kadena — a blockchain enterprise offshoot of JPMorgan Chase’s Blockchain Center of Excellence — who stated:
“It’s hard to avoid the conclusion that the launch of UNI is in reaction to not just SUSHI’s vampiric activities, but also the frenzy surrounding liquidity mining. As Uniswap has stated, this ‘governance’ token will not govern anything related to Uniswap’s actual day-to-day function, except the emission of UNI itself to AMMs, meaning that its real function is to create an inflationary asset.”
Soon after launching, UNI reached a high of $8.60, which left some traders unsurprised, as they believe its total market valuation could reach $3 billion to $5 billion. However, the price soon corrected and is currently trading around the $4 mark, which is indicative of the fact that the token distribution and incentivization strategies were a lure for investors to come back from SushiSwap’s generated liquidity. Popejoy commented:
“I find it a confusing move from a project that has wildly succeeded without needing any governance or explicit incentive programs or airdrops. That said, as a way to raise a lot of money and grab the spotlight back from SushiSwap, it makes sense in the short term.”
The common consensus in the community is that Uniswap is one of the major foundational DeFi projects, while SushiSwap is seen by some as a high-risk project, considering that the previous head, Chef Nomi, dumped the tokens that were part of the developer pool days before the Uniswap migration and faced allegations of it being an exit scam. Uniswap, however, is seen as a more stable project within the DeFi community; thus, a price correction hasn’t seemed to deter investors from the UNI tokens. Vadim Koleoshkin, co-founder and chief operating officer of DeFi service provider Zerion, told Cointelegraph:
“I bet that Uniswap is one of the most known projects in DeFi space and the release of UNI attracted a lot of attention among investors that were not previously involved in DeFi. Especially on the Asian market, where we see a rising demand for DeFi assets. In my opinion, $5B+ fully diluted valuation might be too high, but the market will decide what the real value is.”
How can SushiSwap respond?
Even after this setback caused by the launch of UNI, SushiSwap can’t be written off right away, as it’s still among the top 10 highest-valued projects in DeFi, with a total value locked of over $460 million, according to Defi Pulse. Chef Maki would now be keen to explore avenues that attract genuine investors to the coin and the platform. Exploring the possibilities of gaining back the lost liquidity from Uniswap, Bankman-Fried said: “Potentially — I think building great features would be the biggest thing. […] I’d personally love it if sushiswap made some of the rewards vesting, and if margin trading was implemented”
As Bankman-Fried suggested, there are several ways of attracting liquidity to a DeFi platform, but holding on to this liquidity may prove to be the biggest challenge, as was evident with the migration of funds back to Uniswap after the UNI token launch. Referring to SushiSwap, Koleoshkin stated:
“They always can attract some liquidity with high APY for yield farming. However, the real yield for liquidity providers comes from the trading volume, so Uniswap is far ahead from SushiSwap. It is a matter of time when liquidity will come back to Uniswap. Sushi might attract liquidity for a long tail of tokens that plan to launch soon. This will bring more volume to their protocol.”
Beginning of the DeFi wars?
The rivalry between Uniswap and SushiSwap could be seen as one of the first instances of DeFi platforms battling among themselves for liquidity and, in turn, investors’ attention. SushiSwap’s vampire mining attack on Uniswap’s liquidity attracted a huge amount of attention and investors to its platform, even if it held this spotlight for just a little while.
In the short term, there could be more token launches that offer generous incentives that manage to attract customers for quick profits, but how beneficial this will be in the long term remains to be seen. It’s likely that only tokens with fair distribution strategies and that take along the whole community will win their loyalty in the long run. That being said, such rivalries are bound to bring out innovation, be it with business model designs or with distribution strategies like that seen with UNI.
Whether these rivalries are beneficial to the crypto community as a whole remains to be seen. Fried discussed the question of if they could have a positive effect on the industry: “It could be — and they could tear people apart, which is bad. On the other hand, it’s hard to build if you have to tiptoe around.” In Popejoy’s view, these rivalries might not be best referred to as DeFi wars, as these sort of events have been witnessed in the past, as well:
“We’re seeing governance tokens potentially emerge as a new version of the ICO bubble that exploded in 2017, only to deflate spectacularly in 2018. Almost all of these run-ups on liquidity mining and governance tokens are inflationary and short-term. It seems odd to me as they seem almost intentionally designed to lose value in the long term. My hope is that this is not the case and that governance tokens don’t tarnish DeFi overall if/when the bubble bursts.”
From a DeFi-wars perspective, Koleoshkin lauded Ethereum for being the blockchain that allows such activity to happen, which keeps it interesting for analysts and investors alike: “There is still competing on all levels — infrastructure, protocol, interfaces, wallets. This drives the ecosystem forward at a fast pace. Protocol competition will lead to lower fees, and eventually, all will become a public good.”
Regardless, rivalries between platforms usually increase the visibility of said platforms and, thus, attract more investors. They could also go on to act as a catalyst for higher mainstream adoption of crypto and be a guideline for fair distribution strategies in the community. Due to the lucrative returns of such competing platforms during the time of launch, they could also act as a source of new investors entering the industry at a faster rate.
Ray Schuetz received a Masters Degree in computer science from The University of Texas (Austin). Ray has been working as a full-time blockchain consultant for the past 3 years. In his spare time, Ray enjoys writing for EthereumCryptocurrency.com and other crypto news publications.