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DEX SushiSwap has grown beyond the simple fork of Uniswap that it was 5 months ago. In particular, much of its popularity can be attributed to the lucrative farming programs the decentralized exchange has been offering, in quite the stark contrast to Uniswap’s conservative approach.

What You’ll Learn

  • How SushiSwap works
  • Choosing a liquidity pool to join
  • How and where to purchase cryptocurrency
  • How to install and set up MetaMask
  • How to provide liquidity on SushiSwap
  • How to farm SUSHI

How SushiSwap Works

SushiSwap is a decentralized exchange that was forked from Uniswap in August, 2020. The way the platform works is very simple. There are pools of pairs of assets where people can buy or sell cryptocurrency, and provide or remove liquidity. Here’s an example. Let’s say that you have $100 worth of ETH, and that you don’t like it just sitting around in your wallet doing nothing. What you can do is exchange $50 of the ETH for, say, DAI, and then add your DAI and ETH to the DAI-ETH liquidity pool (LP) on SushiSwap. Based on the total amount of liquidity in that pool, you will own a certain share. For example, if the total liquidity of the pool is $200 after your investment, you will have a 50% share.

SushiSwap pays out 0.25% of each trade in a pool to liquidity providers. This means that every time someone purchases ETH or DAI from the pool, your stake will increase proportionally. With small volumes that doesn’t amount to much, but in the larger pools, with millions of dollars worth of trading volume each day, liquidity providers can make a lot from transaction fees; how much you get from the total of the fees is based on your share. In our example, if there’s $100,000 worth of trading volume in the DAI-ETH pool, the total fees will be $250 (0.25% of that) and your share will be $125.

At present, many liquidity pools on SushiSwap come with the option to farm SUSHI — the native-to-the-platform token. The yields vary from the “normal” 50 – 80 percent annual percentage yield (APY) for the more popular LPs, to the startling 200%+ APY on less popular LPs. The two categories of LPs can be found on two different pages: the standard Farms page where the more popular LPs are listed, and the Onsen Farms page where less popular, newer LPs are listed.

The APY that is shown on the Farms and Onsen Farms pages is based on the price of SUSHI in US dollars, and does not include the 0.25% fee that you will also be earning when farming SUSHI. For those who don’t know, APY is the interest you will earn on the principal, e.g., if you invest $1,000 and the APY is 50%, after one year, if the numbers remain the same (which they won’t), you will have earned $500 in SUSHI tokens.

Since the amount of SUSHI you get per day depends on the valuation of your crypto assets in US dollars (you get X amount of SUSHI per $1,000 worth of crypto assets in a liquidity pool), the amount of SUSHI you earn strongly depends on the performance of the crypto market as a whole; if it is doing well, so will your returns; if it is doing bad, your ROI will decrease proportionally. That is why it’s imperative to follow the market closely, and to react appropriately to its behavior.

Here are two great tools that will help you stay on top of your DeFi portfolio:

  • DeBank — shows you all of your positions throughout different DeFi platforms.
  • Croco Finance — shows you data about the liquidity pools you have joined (accumulated fees, transaction expenses, etc).

Comprehensive details about how SushiSwap works can be found on their Documentation page.

Farming SUSHI on SushiSwap: Step-by-Step Guide

In several steps, we will outline the entire process of adding your cryptocurrency to a liquidity pool, and then staking your share to farm SUSHI tokens. First, let’s explain, in a nutshell, how farming on SushiSwap works. The steps are as follows:

  1. You choose a liquidity pool based on thorough research of crypto assets and careful analysis of your financial situation.
  2. You purchase the necessary cryptocurrency.
  3. You install and set up MetaMask.
  4. You add your crypto assets to the LP you chose.
  5. You stake your SLP tokens (when you join an LP you receive SLP tokens in return; they represent your share in the pool).

Note: Not all SUSHI you farm becomes available instantly: one third of it is claimable as soon as it is minted (your SUSHI compounds with every new Ethereum block that is created); the remaining two-thirds are locked for 6 months. You can see how many SUSHI you can claim and how many are locked on SushiSwap’s Portfolio page.

Step 1. Choosing a Liquidity Pool

Earlier, we classified the two main types of LPs available on SushiSwap. Naturally, the Onsen Farms are more risky, but yield higher returns. Conversely, the more popular LPs are less risky, but yield lower returns (though the returns are still something to behold compare to traditional markets).

Thus choosing a liquidity pool is something each individual must do on their own by carefully researching all things necessary. That means weighing the amount of risk you are willing to take based on your current financial situation, and thoroughly researching prospects. For beginners, the established LPs on the Farms page are the preferred choice, more specifically, a liquidity pool with a stablecoin and another asset. Stablecoin pools are less risky since they are less prone to market volatility (you only have one asset that is volatile, though impermanent loss is still a factor).

Step 2. Buying Cryptocurrency

Depending on the country you are in, you should use a different exchange to purchase crypto assets. Here are the best options currently available:

All of these platforms offer simple and intuitive UI for purchasing cryptocurrency. Since we will be working with SushiSwap, which is based on Ethereum, purchasing at least some ETH is required (we will be using that to pay for transaction fees). The rest of your purchase should involve the assets that represent the liquidity pool (pools) that you’ve chosen to join.

For example, if you are going to be joining the SUSHI-ETH liquidity pool, you need to purchase dollar-equivalent values in both SUSHI and ETH (and some additional ETH for transaction fees).

If an asset is not available for purchase on the platform you have chosen, and you don’t want to use another platform to purchase it, you can buy ETH instead and then swap that for the asset you need on SushiSwap (though keep in mind that transactions on a decentralized exchange like SushiSwap are costly).

Step 3. Installing & Setting Up MetaMask

In order to work with SushiSwap, you will need to install MetaMask — a browser extension that allows you to interact with the Ethereum blockchain. If you already have the extension installed, and you know how to work with it, you can skip this step.

Once installed, a new tab in your browser will open, which will initiate the process of creating your MetaMask vault. The MetaMask vault is like an Ethereum wallet that allows you to send transactions to the network from your browser.

Clicking the Get Started button will take you to the next step of the process, where, you need to click the Create a Wallet button. After agreeing (or disagreeing) with providing data to improve MetaMask, you will be greeted by a page where you can create a password for your vault. Once you are through with that, you will arrive at the most important step of the process — backing up your secret phrase.

The phrase is comprised of 12 random words that you will need to either download to your computer and store somewhere safe, or write on a piece of paper and hide somewhere obscure (the latter is the preferred approach). The phrase acts as your “forgot my password” option. Due to the nature of Ethereum, there is no email involved with creating an account, so the traditional way of recovering a forgotten password is not viable; only through your secret phrase can you recover your vault if you forget your password, or delete MetaMask by mistake.

Once you have the 12 words safely backed up, you will be asked to confirm them, i.e., write them out in the correct order. After that, your MetaMask vault will be created.

An Ethereum address will be generated immediately, under the “Account 1” label. The sequence of numbers and letters below the Account 1 label is your Ethereum address. Think of it as your IBAN. Now, since you will be interacting with SushiSwap via MetaMask, you will need to send the crypto assets you purchased from the crypto exchange to Account 1. So copy the address by clicking on the label, go to your exchange, and withdraw your cryptocurrency to that address.

Note: Do not send non-Ethereum-based cryptocurrency to a MetaMask address.

It takes some time for withdrawals from exchanges, so wait patiently until the assets arrive in your MetaMask vault.

Step 4. Investing in a SushiSwap Liquidity Pool

At this point, you have set up the stage and are ready to invest in a SushiSwap liquidity pool. So open up and find the LP you chose to join. To illustrate the process, we will use the Donald Dai LP (DAI-ETH) as the crux of our example. At the time of writing, the APY of the pool is around 80% (0.274 SUSHI per day paid per $1,000 liquidity at $8.40 per SUSHI).

Screenshot of SushiSwap DAI/ETH pool
SushiSwap DAI/ETH liquidity pool, as seen on 22 January 2021.

The first thing you need to do is to click the Connect Wallet button at the top right (you need to log in to your MetaMask vault beforehand), then click Connect below the MetaMask option. A confirmation window will appear that will ask you for permission — on behalf of SushiSwap — to view the addresses in your MetaMask vault. Click the Connect button.

Next, focus on the section to the right:

SushiSwap add liquidity section

Enter the amount of DAI you want to inject into the pool, and the needed ETH will be automatically calculated. If you have ETH instead of WETH, click on the WETH label and select ETH from the options. The first time you click to select a token on SushiSwap, you will be asked to select a list. That list is a library of token names and abbreviations mapped to smart contract addresses. I personally like to use the full CoinGecko list, which you can find here. Paste that URL into the input of the Manage Lists window, click Add, and then select CoinGecko:

SushiSwap Manage Lists window

Now you will be able to select ETH instead of WETH. Again, the amounts will be automatically calculated based on the current exchange rate of DAI against ETH in the LP.

Next you need to click the Approve button, which will be the first transaction we will be sending to the Ethereum network. Depending on its load, the transaction fees could be as high as $50 a piece (we will be sending a few). Confirm the transaction on MetaMask and wait for its confirmation.

Once confirmed, you will be able to add liquidity to the pool. Click the Supply button and confirm the transaction. Once it is added into a block, your liquidity will show up below the Supply button.

Step 5. Staking Liquidity Tokens

In exchange for staking your assets in the liquidity pool, you will have receive tokens that represent your share. In SushiSwap, those tokens are called SLPs. For instance, if you joined the DAI-ETH pool, you will own some amount of DAI-ETH SLP tokens. When you want to withdraw your stake, these tokens are used by the system to return you the correct amount of underlying assets.

Staking your SLP tokens is how you farm SUSHI. Click the Stake tab next to the +Liquidity tab and click the Approve Staking button; confirm the transaction and wait for it to be included in a block.

Finally, click the Stake button and then click the MAX label on the slider (or slide to the end), and then click Stake. Confirm the transaction and wait for it to be processed.

Once it is processed, you will have successfully invested in a SushiSwap pool, staked your SLP tokens, and will be farming SUSHI tokens in proportion to your investment in US dollars — you can follow your progress on DeBank, or on SushiSwap’s Portfolio page.

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