Blockchain applications are open and transparent. The advantage is that anyone can review the project and confirm whether the process is operating in the established way. But there is an interesting downside. Because the source code is public, it is easy for anyone to copy an existing project (“fork” project) and release a competing platform.
With the development of the DeFi ecosystem, some projects have begun to enjoy strong product and market fit, and have a real source of income. Therefore, it is not surprising that the community is now arguing about the impact behind the protocol war. Anyone has the ability to fork successful projects and try to grab their market share. Let us look at an example.
DeFi protocol battle: Sushiswap vs Uniswap
The agreement war kicked off at the end of August, when an anonymous developer team suddenly announced Sushiswap, which is a new decentralized exchange (DEX) that almost completely replicates Uniswap, but there is a small adjustment: Sushiswap will increase The $SUSHI token is used as a governance token (holders can vote on the platform’s proposals and modifications), and can also accumulate 0.05% (5bps) of all transactions on the platform.
The addition of $SUSHI tokens is not a pioneering move, but Sushiswap believes that their model provides better incentives for liquidity providers (LP). As pre-conceived, Sushiswap can obtain more liquidity than Uniswap, thereby bringing better transaction execution to traders, and ultimately bringing more transaction volume to Sushiswap. This market is very impressive. Uniswap currently generates more than $1 million in daily expenses (but mainly paid to LP).
There is another positive factor. Sushiswap also integrates farming income as a fair token distribution mechanism and a clever path to transfer Uniswap’s liquidity to Sushiswap. It works like this.
Provide liquidity (such as ETH or USDC) to selected Uniswap pools, and the pool grants “Uniswap-LP-Pool-Tokens”, representing your share of liquidity in these pools.
Deposit these Uniswap-LP-Pool-Tokens into the Sushiswap contract (staking), and Sushiswap will distribute $SUSHI tokens proportionally. This is how $SUSHI detonated the market, for those users who promise liquidity to Sushiswap.
At a future point in time, the Sushiswap smart contract will convert all pledged Uniswap-LP-Pool-Tokens into Sushiswap-LP-Pool-Tokens, and redeem all pledged Uniswap asset pools and deposit them in the same Sushiswap pool.
What is the end result? Uniswap’s liquidity will be automatically migrated to Sushiswap. This process is driven by users who seek to obtain $SUSHI tokens in proportion, effectively guiding a new DEX and weakening the existing DEX. This is a full-scale liquidity war.
What are the consequences?
The consequences of this liquidity war are enough to write a novel. In simple terms, nearly $2 billion of Uniswap-LP-Pool-Tokens were deposited into the Sushiswap contract, earning $SUSHI tokens for its depositors. The yields of these Sushiswap pledgers once exceeded the 1,000% annual interest rate, which promoted this wave of gains. At the same time, behind such a strong deposit, $SUSHI was listed and traded on DEX and some centralized exchanges, and rapidly appreciated, reaching a market value of 300 million US dollars.
But in the following week, everything began to fall apart. Prices began to fall, more and more tokens were cast into farming farmers, and some users were only interested in selling Sushi. The price drop prompted an anonymous main developer (“Chef Nomi”) to sell $14 million in $SUSHI tokens to secure long-term funding. However, this was a fatal shock to the community and a betrayal of trust (he previously promised to avoid selling any tokens), and he was kicked out of the project (later issued an apology and returned the funds).
But the damage has been done and cannot be repaired. Although Sushiswap successfully migrated Uniswap’s liquidity and launched their exchange, the initial energy and enthusiasm has weakened. It is worthy of Sushiswap’s praise that the project now has its own life, with the goal of potential integration with other blockchains (such as Solana) and charting its own path.
Interestingly, Uniswap was not passively beaten. Although they didn’t have a native token before, it can be said that it suddenly became a key disadvantage. So on September 17, Uniswap launched $UNI as a governance token, and quickly airdropped about $1,000 of $UNI to every previous Uniswap user, rewarding past contributions and continued loyalty, and also farming through revenue To allocate the remaining $UNI.
Today, Sushiswap maintains a TVL of US$300 million, a trading volume of US$40 million per day and a market value of US$100 million. For a one-month-old project, it’s not bad. But compared with Uniswap’s $2.2 billion TVL, $300 million per day trading volume and $300 million market value, Sushiswap pales in comparison. The winner of this war belongs to Uniswap.
When Sushiswap took the lead, other projects followed up quickly. As a few notable examples:
Curve fork project Swerve; Compound and Balancer fork project CREAM and so on.
All these wars have occurred in the past two months, and the fork project has achieved varying degrees of success. But it is worth noting that no project can surpass the incumbent. However, each project has successfully survived and has its own life, constantly developing new functions in the community and optimizing products to adapt to the market.
Protocol wars and the future of DeFi
In the agreement war, none of the forked projects succeeded in surpassing the incumbents. This fact is gratifying. Consider that if Sushiswap is successful, we can think of it as predicting its own demise through a successful attack pattern. After that, another fork project can attack Sushiswap to provide a weather vane in the same simple way! In short, Sushiswap has not been able to surpass Uniswap so far. This is an early but important data point, and true differentiation may require winning in the open market. Coincidentally, Sushiswap’s new roadmap hints at more ambitious features that can bring this necessary differentiation.
The deeper meaning is that the switching cost in DeFi may be greater than imagined. Although copying the code is simple, you cannot copy the community, brand, trust, market, and brand awareness. But no matter what the reason, customers seem to be attracted by Uniswap, not others, which helps to ensure the current lead.
Other thinking
Farming income cannot continue to grow equitably: Protocol warfare attacks promote maintenance by directly distributing most (sometimes all) tokens to protocol users, but sustainability requires long-term incentive mechanism adjustments. Once the tokens are distributed, how to incentivize developers to continue building? Will the community be able to properly guide the nascent agreement over time? There are many possible answers to these problems, but they are not yet clear.
Community governance will be a challenge. Adopting a decentralized project based on token governance is a new structure, and there may be many compromises. This situation is more serious in protocol warfare projects, because by definition, these projects are new projects that require rapid community formation to succeed. Therefore, they may naturally attract short-term stakeholders, and these stakeholders may not be consistent over the long term.
Chaebol or democracy? In the case of Sushiswap, a large number of users participated in a nascent exchange, pledged millions of dollars, and received a large amount of SUSHI in return, which is enough to exert strong control over the future of the agreement. There are many implications here, but these projects may end up more like chaebols than democracies.
Anonymity has its dark side. The founders of many projects are anonymous (such as “Chef Nomi”), which is both good and bad, allowing anyone in the world to contribute and own part of the new agreement, but it is also possible for bad people to create malicious projects. The hidden back door steals all funds and exits the scam.
Finally, there is no doubt that this is a fascinating new era. They are similar to a turning point in blockchain forks, such as Bitcoin vs Bitcoin Cash or Ethereum vs Ethereum Classic, but are more like applications than blockchains. Similar to forks, these applications must quickly gain the community, show superior products, and hope to surpass the existing ones. But as seen in the blockchain fork, you cannot fork the community, the developers, the trust it builds, or its brand and brand awareness.
This bodes well for the future of DeFi. It also means that founders who build unique projects and strive to gain a leading edge in community and traction can have a certain defense against protocol warfare attacks, and ultimately encourage more builders to create new ones. The project promotes the development of DeFi.
