A Deep Dive into Sushi: Otoro for Breakfast – A Fundamental Analysis (Part 1)

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Treehouse Research
04/10/2021

Itadakimasu, and welcome to Part 1 of Treehouse’s valuation series of Sushi!

Over the past 12-months, Sushi has cemented itself as a leading protocol in DeFi. The platform started as a fork of Uniswap but quickly innovated by introducing governance and an entire ecosystem of tools. To date, its AMM (automated market maker) has helped users transact over 5 million swaps across 1,992 pairs. For more details, check out their official website!

Here at Treehouse, we have prepared an Omakase meal to provide you with a comprehensive analysis of the token SUSHI. Our menu is as follows:

Part 1. Fundamental Analysis 

Part 2. Structural Analysis

Part 3. Comparative Analysis

Part 4. Quantitative Analysis

Part 5. Intangible Analysis

*For clarity: ‘Sushi‘ refers to the entire ecosystem of decentralized services and ‘SUSHI’ represents the native token of the Sushi ecosystem*

TL;DR | Our Methodology

In this article, we performed a fundamental analysis of SUSHI by projecting the trading fee growth for each of its features. Using a DCF (discounted cash flow) model, we arrived at a fair value of $14.21 per SUSHI. 

Introduction to the Sushi Ecosystem



SushiSwap

The core of the Sushi ecosystem – SushiSwap is an AMM governed by a 50/50 constant product model. 

Fees: 0.25% to LPs, 0.05% to xSushi holders
Potential Growth (Base Case) from 2021 to 2026: 51.04% CAGR

MISO

MISO (Minimal Initial Sushiswap Offering) is Sushi’s IDO (Initial DEX Offering) platform for newly curated project listings. The platform opened up in May 2021, and 3 tokens (SAK3, Manifold, Sunder) were successfully offered within its 1st month. The goal of MISO is to help feed more trading volumes into SushiSwap. 

Fees: No direct listing fees, part of the auction fees will be used to seed initial liquidity
Potential growth (Base Case) from 2021 to 2026: 217.97% CAGR

Onsen

Onsen is SushiSwap’s liquidity mining incentive program, launched in Dec 2020 after a governance proposal. It aims to increase liquidity for new token pools by rewarding LPs (Liquidity Providers) with additional SUSHI rewards on top of the project’s tokens. Currently, the two largest Onsen pools are WETH/ALCX and BIT/WETH.

Fees: 1000 SUSHI application fee as additional liquidity into SUSHI-ETH LP pool
Potential growth (Base Case) from 2021 to 2026: 62.27% CAGR

Kashi

Kashi is Sushi’s lending protocol for margin trading. Assets used for lending on Kashi comes from the BentoBox, a token vault that facilitates cheaper transaction costs through gas-efficient routes.

Fees: Interest and liquidation payments – 90% to lenders, 9% to xSushi holders, 1% to BoringCrypto (Kashi’s developer). Flat borrow fee of 0.05% paid to lenders
Potential growth (Base Case) from 2021 to 2026: 96.88% CAGR

Shoyu

Shoyu is SushiSwap’s soon-to-launch NFT marketplace. Shoyu’s webpage went live last month and has the potential to significantly increase fees to xSushi holders. Shoyu also has higher fee margins compared to the other Sushi products. 

Fees: 2.5% of trading volume to xSushi holders
Potential growth (Base Case) from 2021 to 2026: 152.17% CAGR

SushiBar

SushiBar is a staking platform to further incentivise activity within Sushi’s ecosystem. The platform allows SUSHI holders to earn an additional return on their SUSHI tokens. Staking SUSHI in the SushiBar returns xSushi tokens, which accrues fees from all of Sushi’s products. These fees are analogous to cash flow generated from Sushi’s ecosystem, allowing us to perform a DCF analysis on the token SUSHI. 


DCF Model

SUSHI staked in the SushiBar for xSushi accrues more SUSHI, generated by the trading fees from the Sushi ecosystem. As such, by discounting future potential fees back to the present, we can derive a hypothetical fair value for SUSHI. Treehouse’s DCF model segments and projects trading volumes for each product to obtain an accurate analysis of the entire ecosystem.

We project future trading volumes based on each feature’s proportion, as shown below:


Our bull, bear and base case for Sushi’s monthly growth rates are as below:

ScenariosGrowth rateRationale
Bull1. Starting rate: SushiSwap’s monthly growth rate (Sep 2020 – Aug 2021)  ~ 15.17%

2. 95% monthly stepwise decline till terminal growth rate* (0.51%)
We referenced SushiSwap’s average monthly growth rate as a conservative bull case.
Base1. Starting rate: Uniswap’s monthly growth rate (Sep 2020 – Aug 2021) ~ 11.74%

2. 95% monthly stepwise decline till terminal growth rate* (0.51%)
Uniswap is by far the most mature AMM. We conservatively assume in our base case that Sushi grows at the same rate as Uniswap.
Bear1. Reaches terminal growth rate* in Aug 2024 after a 95% stepwise decline. 

2. Derived starting rate of 3.39%
We assume SushiSwap reaches its terminal growth rate within 3 years.
*We use the average IMF world nominal GDP growth rate to be Sushi’s terminal growth rate


In our analysis, we used the following fair value bounds of SUSHI supply:

  • Lower bound: Fully Diluted Supply (250,000,000 SUSHI)
    • Rationale – We assume full staking of all SUSHI in the SushiBar up to the capped supply.
  • Upper bound: Total SUSHI currently staked in SushiBar (76,000,000 SUSHI) (As of 30 Sep 2021)
    • Rationale – Fees only flow to SUSHI that is presently staked in the SushiBar.

We chose a discount rate of 40.0% in our model, a value in line with the 30% – 60% range used for emerging companies. We believe that a 40.0% discount rate lies on the conservative side considering Sushi’s sizable user base and prominence in DeFi

Our scenario-based valuations:

ScenarioFully Diluted Supply
(Lower Bound)
SushiBar Staking
(Upper Bound)
Bull$ 9.86$ 32.44
Base$ 5.84$ 19.22
Bear$ 1.71$ 5.63


Upcoming / Future

The good times are still rolling for Sushi, with many highly anticipated upgrades coming in the near term. Besides Shoyu’s launch, a key milestone to watch is Sushi’s Trident upgrade. Such positive developments will likely align Sushi’s growth to its current CAGR or at an even higher rate. As such, we attribute the following weights to each scenario to derive a final SUSHI value.

Final ValuationWeightsFully Diluted Supply
(Lower Bound)
SushiBar Staking
(Upper Bound)
Fair Value
Bull40%
Base40%$ 6.62$ 21.79$ 14.21
Bear20%

SUSHI is currently priced at $10.40 at the point of writing, situated within the lower end of our valuation range. Further upside could very well be on the cards although this analysis only takes into account our assumptions made in the DCF model. 

From a fundamental perspective, this is just one of the many possible ways to look at SUSHI. Drop us a note at [email protected] or comment on our community Telegram channel to let us know how you would value SUSHI! Otherwise, stay tuned for more Treehouse Insights content!

*Treehouse holds SUSHI. Not Financial/Investment Advice. Always Do Your Own Research. For Educational Purposes Only.*

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