SundaeSwap: Decentralized Finance on Cardano

The time has finally come for the highly anticipated and long-awaited SundaeSwap DEX on the Cardano network.

There is no question that DEXs such as Uniswap, SushiSwap and QuickSwap have changed the financial landscape and completely redesigned what was once thought impossible in a financial ecosystem. Decentralized Finance (DeFi) is growing at breakneck speeds and is enjoying rapid rates of global adoption as more people wake up to the power of DeFi and all the benefits it has over the traditional financial industry and centralized cryptocurrency exchanges.

Cardano has been in development for years, meticulously perfected and crafted by Cardano founder Charles Hoskinson, his team, and the global community of active users and developers. 2022 was a big year for the network as the completion of Cardano’s Goguen era has paved the way for smart contracts and DApps, which means the Cardano network is just getting started. This has led to the development of SundaeSwap and a host of other DApps being deployed and developed, solidifying Cardano as a top ten project joining the ranks alongside Ethereum, Solana, Terra, Avalanche, and others as a top layer one smart contract protocols.

If this is your first time hearing about Cardano, or you want to learn more about this next-generation network that many crypto enthusiasts and institutions feel may become the future of blockchain, be sure to check out our deep-dive Cardano review If you already know all about Cardano, then grab a spoon and let’s dig into SundaeSwap.

Disclaimer: I hold Cardano in my personal crypto portfolio.

About SundaeSwap

SundaeSwap is a decentralized exchange (DEX) built for the Cardano blockchain. Similar to how Uniswap was built for Ethereum and QuickSwap was built for Polygon, SundaeSwap is Cardano’s solution.

SundaeSwap is the first DEX in the Cardano ecosystem. It allows blockchain participants to provide liquidity and create a market for users to exchange their tokens. Similar to Uniswap, users who exchange tokens on the DEX pay a small fee that gets paid to liquidity providers as an incentive for providing liquidity.

SundaeSwap aims to be much more than a simple DEX where users can swap tokens. However, SundaeSwap also plans to feature staking, lending, borrowing, and more. The protocol is defined by a series of immutable, permissionless, and decentralized smart contracts which allow users to trade assets without a third-party intermediary.

The SundaeSwap protocol was released as a testnet in Q4 of 2021, which allowed users to test and play around with the platform. The fully-functional beta DEX was released on January 20th 2022. At the time of writing, the platform is a fully functional DEX. However, there are still improvements and “cherry on top”, exciting features in the pipeline yet to be released.

While the launch of the DEX was not without a few hiccups in the opening days (more on that later), SundaeSwap looks to be thriving and doing well, with many of the early issues being ironed out and the DEX in full use by many Cardano users. According to the SundaeSwap team, the launch was a huge success:

 image via sundaeswap-finance.medium 

The first week of the launch saw mass excitement and usage from the Cardano community who were eager to dive into the world of DeFi on Cardano, resulting in the platform reaching some impressive milestones:

• $71.69 million total value locked
• Over 300 active trading pools on the exchange
• 100% uptime
• No security issues

SundaeSwap Initial Stake Offering (ISO)

Rather than build and manage their own Cardano stake pools, SundaeSwap turned to trusted members in the stake pool community to run stake pools. These stake pools do the heavy lifting when it comes to processing transactions. There are 30 community elected stake pools referred to as “Scoopers,” keeping true to the ice cream theme.

The first round of ISO rewards was calculated on January 25th, and users could participate in the ISO between epochs 316-320. Users who delegated their ADA to qualifying ISO scoopers prior to 21:45 UTC on January 25th could earn SUNDAE tokens for all five ISO rounds.

The ISO began on January 20th and continued for 5 epochs, with rewards (5% of the total SUNDAE supply, 1% per epoch) being distributed based on the snapshots taken at each epoch. Users could participate in the ISO rounds by delegating their ADA to the qualifying Scoopers before the following deadlines:

Getting involved in this ISO would have been a great way to earn some SUNDAE tokens. If you missed the banana boat on the SundaeSwap ISO, no worries, there are plenty of other ways to earn on the SundaeSwap DEX, more on that below. If you are interested in staking ADA into ISPOs for other projects, you can find a Youtube Video from Learn Cardano all about staking ADA into ISPOs.

Getting Started & Wallet Support

Like with any DEX or DeFi protocol, the first thing users will need is a crypto wallet to interact with the platform. The following Cardano wallets are currently able to interact with the SundaeSwap DEX:

• https://ccvault.io
• https://www.namiwallet.io/

Support for additional wallets will be coming soon. In addition, users can import their Yoroi or Daedalus wallet addresses into the Nami wallet. Both ccvault and Nami Wallets are browser extension wallets. Therefore, using them should feel quite familiar for anyone who has used a Metamask wallet with a DEX such as Uniswap or SushiSwap.

Once users have their Cardano wallet of choice, they will likely want to fund the wallet with some ADA before interacting with the DEX. Cardano can be found at most major exchanges such as OKX, Binance, Kraken, Coinbase, HTX, KuCoin and more.

Once a user has their wallet, and it is funded with some ADA, they are now ready to connect their wallet to the SundaeSwap interface. Once on the SundaeSwap site, users will want to click “connect wallet” in the top right.

Users will need to review the screen and, if agreeable, accept the disclaimer, user terms and privacy policy, then select their wallet from the list that pops up and follow the instructions that will appear on the wallet application.

And that is it; users can now access the deliciousness of the SundaeSwap DEX!

Enable Collateral

It is important to note that users on SundaeSwap will want to enable collateral within the ccvault wallet and Nami wallet. If the collateral option is not enabled, users will likely encounter an error that looks like this as soon as you try and access some features on the SundaeSwap DEX:

To avoid this error, users must go into the wallet settings. In the settings, there is an option to turn collateral on. If there is not already a UTXO address listed that the wallet can use, the user can enable collateral, and from there, they will be prompted to sign a transaction. This will create a UTXO address and send 5 ADA from the user’s ADA balance. This will provide the user with a UTXO address for collateral needed to interact with some SundaeSwap smart contracts. You can read more about this from the SundaeSwap help articles.

Here is how enabling collateral looks on the ccvault wallet:

On Nami wallet, users can click on the little robot icon on the top right:

And make sure that at least 5 ADA is added as collateral:

Once that has been done there shouldn't be any further sticky mishaps.

SundaeSwap Platform Features

SundaeSwap is a robust platform, more than just a plain vanilla DEX. In ice cream terms, think of SundaeSwap as well… The sundae of ice cream. This is no boring vanilla cone or lame single scoop of strawberry in a cup. Instead, this sundae is complete with all the flavours, sauces, sprinkles, cherries, whip cream and everything an ice cream enthusiast could want.

The SundaeSwap team has even made it clear that they have some extra tricks up their sleeve and holding some cards close to the chest, which makes it sound like some exciting announcements are yet to be made. Enough with the ice cream metaphors; let's get into the current features of the DEX.

Swap

In case it wasn't already obvious, swapping assets is the heart and soul of a DEX. Users can use SundaeSwap to swap assets within the Cardano ecosystem.

Swapping is fairly straightforward and familiar to anyone who has used a DEX. Users simply choose the token they wish to swap and receive, enter the amount and hit swap. If the desired token is not found, users can search for a token using its name, symbol, or pasting its policy ID. Note that all swap fees are paid in Cardano's ADA token, so be sure to have some extra on hand.

One thing I like about SundaeSwap is the advanced slippage options that users can select and the dropdown menu that shows additional information such as estimated tokens received and minimum tokens received in the event of slippage so users can avoid nasty surprises. This helps combat issues that may arise with market congestion, delayed orders and slippage:

As with any good DeFi protocol, there is nothing sweeter than high APYs and passive income. The earning selection for SundaeSwap comes in a few different flavours such as:

Providing Liquidity

Advantages:

• Earn passive income from trading fees
• Higher APY than simply staking ADA
• Users can participate in yield farming with the LP tokens received by providing liquidity for extra rewards

Disadvantages:

• Users need to provide 2 assets to make a liquidity pair, not just ADA
• Risk of impermanent loss
• Funds are held in a smart contract and not a user’s wallet, opening up risk exposure to smart contract hacks, bugs, and failures

Providing liquidity is the first step to yield farming, but this can also be done as a stand-alone activity. When users provide liquidity, they get back an LP token. This token represents the liquidity provided by the user, and users can then stake this LP token by yield farming for extra rewards. By providing liquidity, liquidity providers (LPs) earn a share of the trading fees processed through a particular liquidity pair.

Depositing Liquidity:

To deposit liquidity, users will need to navigate to the “home” tab via the navigation panel on the left.

Then they can search for a liquidity pool that they want to provide liquidity to, click “more”, then “provide liquidity.”

Once the user is in the provided liquidity panel, they can enter the number of tokens they would like to provide to the pool. Users should consider factors such as TVL, trading volume, and risk assessment of price divergence.

As liquidity needs to be a 50:50 ratio of both assets being deposited, the user needs to hold both assets. Therefore, users only need to enter the amount for one asset. The second will be calculated automatically. Once the amount is selected, users can review and approve the transaction.
Once a user has successfully provided liquidity, they can find details on the liquidity positions by navigating to the “Liquidity” section on the navigation panel:

Withdrawing Liquidity

Users can withdraw the liquidity that they have provided and the fees they earned for doing so. Navigating to the “Liquidity” tab shown above, users will see all the pools they have provided liquidity to. Simply select the pool to withdraw from, click “more”, and “withdraw liquidity.”

From here, users can enter the number of tokens they would like to withdraw, then review and accept the transaction.

Yield Farming

Advantages:

• Users passively earn fees from trading activity on the DEX
• Earn extra rewards on top of liquidity providing in the form of the native SUNDAE token
• Highest APYs

Disadvantages

• Same risks and disadvantages as providing liquidity
• LP tokens may need to be locked up for a period of time to earn rewards

Once users have received their LP tokens from providing liquidity, they can get into yield farming. Yield farming rewards are not offered for every asset pair on a DEX. Users need to check beforehand which asset pairs offer yield farming rewards. At the time of writing, the pairs that offer yield farming rewards are:

• SUNDAE/ADA
• LQ/ADA
• WMT/ADA
• CARDS/ADA

The list of eligible pools will be adjusted by the community vote later as the ecosystem grows and with the launch of stablecoins.

Yield farming is a form of staking used by DEXs to reduce the volatility of their liquidity pools. The SundaeSwap team has set aside 500,000 SUNDAE tokens to allocate to yield farmers over the first six months of the DEX’s operation.

The process of yield farming of the SundaSwap DEX works as follows:

1. Liquidity providers receive LP tokens in exchange for depositing a pair of assets into a pool.
2. If the LP tokens received are for qualified pools, Liquidity Providers will be able to stake their LP tokens into the yield farming contract and obtain additional yield on top of the fees they receive for being a Liquidity Provider.
3. Initially, yield farming contracts will be set for 30-day terms. Terms will roll over automatically. Users do not need to withdraw and re-stake to continue earning yield.
4. At the end of each yield contract term (30 days), users may withdraw their initial LP tokens and any LP tokens earned as yield from qualified pools. Early withdrawal results in no farming rewards being earned. Withdrawing from a rolled over term early will not invalidate yield earnings from completed earlier terms.
5. The SundaeSwap DAO will swap these additional yield-generated liquidity tokens for SUNDAE.

AMMs, Constant Product Liquidity Pools, and Scaling

Time to nerd out a bit and go through the back end on how this all works. This is a high-level overview; if you want to dive deep into all the bits and pieces, you can find it all in the SundaeSwap Fundamentals documentation.

Traditionally, an exchange acts as a central authority, maintaining an order book and matching buyers with sellers to make the exchange. This creates massive potential for the centralized entity to manipulate the market for further profit. One of the most significant innovations developed in the decentralized finance space is the idea of an “automated market maker” (AMM). In the AMM model, the pricing and distribution of assets are done through a mathematical formula or algorithm, removing human error and malicious intents.

Initially, SundaeSwap will provide an AMM that is an adaptation of the model utilized by Uniswap. In this model, liquidity providers deposit equal values of two assets in a smart contract, aka a liquidity pool, and receive tokens representing their portion of the pool of assets. The SundaeSwap team have created this handy PDF that covers the complexities of their AMM model if you fancy some light bedtime reading.

Cardano uses a novel accounting and execution model known as “Extended Unspent Transaction Outputs” (eUTXO), which makes the way the SundaeSwap DEX functions not quite as simple as you would expect as with Ethereum based DEXs. In the eUTXO model, smart contracts are implemented more “passively” than the function calls in the traditional UTXO model and discourage the use of the global state.

This is all a fancy way of saying that the Liquidity Pools utilized by SundaeSwap had to be adjusted and built upon using the foundational framework of a traditional UTXO model but ultimately needed to function slightly differently.

Check out IOHK's paper on Extended UTXO models if you want to learn more.

In a global “SundaeSwap Pool Factory,” a unique token exists and is locked via a script that allows the creation of a specific “Asset Pair Liquidity Pool” unique token. The global token is used in conjunction with a minting policy that ensures that asset pairs stay unique, rather than diluting the available liquidity and suffering from slippage. These unique tokens are always locked in a eUTXO alongside the liquidity stored in the pool, using a validator script that enforces the constraints of the pool.

Here is a diagram showing what the transaction to create a new liquidity pool would look like behind the scenes:

Here is a diagram of what a swap transaction would look like behind the scenes:

Here is a diagram showing what a deposit/withdrawal transaction would look like:

But wait! it isn't all ice cream and rainbows

The model transactions shown above have a severe flaw. Any given eUTXO can only be spent once as part of one transaction, making it appear that only one swap can happen per block. There is roughly one block every 20 seconds on the Cardano network, which would lead to a terrible throughput for any decentralized exchange. The SundaeSwap team has implemented a brilliant scaling solution called the “Scooper Model.”

The SundaeSwap team put their heads together, investing an incredible amount of time and effort into evaluating different scaling solutions. Here is a look at the top solutions that were considered by the team, many of which are already being utilized by other DEXs:

The team ended up going with a solution they are calling AMM Orderbook or the “Scooper Model”. They believe that this solution preserves many of the positive properties of scaling solutions without compromising on many of the criteria they believe to be critical to becoming the leading DEX on Cardano.
Here is a fun visualization showing how each of the proposed solutions stacks up against one another according to the SundaeSwap team:

The solution chosen by the team essentially stems from the same insight that underpins proof of stake protocols. By aligning incentives and creating a system of self-governance, a system can be scaled by building trust into a protocol. SundaeSwap will rely on third-party aggregators, which are called "Scoopers." A scooper builds and submits a transaction that executes swaps against the automated market maker and, in return, collects a fee paid in ADA. This role comes with a large amount of power, so how do we know these "Scoopers" are honest and working for the benefit of the network?

The first step to this is choosing trusted members in the community. Trust is established by understanding that the Scoopers are making decisions in the best interest of themselves and the network by following the governance and incentive structure.

Members need to have enough community votes to receive a license to become an aggregator for the platform to become a Scooper. Scoopers only get paid after the work has been done. If there has been any evidence of these scoopers playing the role of a bad actor, the payment they should receive can actually be re-routed back into the community treasury, which helps keep these Scoopers acting in the best interest of the network and themselves.

You can read more about how the AMM orderbook or Scooper Model works in the detailed SundaeSwap Article.

SundaeSwap Utility and Governance Token

The SundaeSwap (SUNDAE) Token is a utility token central to the operation of the SundaeSwap DEX. As the protocol establishes a DAO and is placed in the hands of the community, the SundaeSwap token will represent voting power within the organization.

Governance began at the launch of the DEX and allows the community to be involved with the platform's future and make important governing decisions. Through SundaeSwap's profit-sharing mechanism, users who participate in building the protocol through governance will earn rewards for their participation. Holding the token can also lead to reduced fees for some platform users; further info on that can be found on the SundaeSwap Finance page.

The entire SUNDAE supply will be 2,000,000,000 tokens, with the majority distributed to users of the protocol. 55% of the SUNDAE supply went to the public, 5% to the initial stake pool offering, 25% went to the team, 13% to investors, 5% to future hires and 2% to investors:

The SundaeSwap token launched with an initial price of around $0.70 early in Q1 of 2022. Unfortunately, like the rest of the crypto market, 2022 was not exactly bullish for SundaeSwap. SUNDAE price has been on a steady decline along with the majority of other crypto tokens as the world goes through economic uncertainties, and fear is suppressing price across the broader investment space.

Many are seeing this decline in price as an excellent opportunity to pick up SUNDAE tokens well below its all-time highs. If SundaeSwap truly does become the Uniswap of Cardano, there may be massive upside potential once the broader crypto market strengthens.

SundaeSwap Governance

It is part of SundaeSwap's mission to be completely decentralized. For this to happen, it is vital for the community to assume responsibility for managing the DEX and its development, plus take control over the treasury. Community guidance through smart contract-controlled voting and governance is a foundational step in creating an ownerless protocol that facilitates direct, trustless interaction between community members and engagement from users.

Due to limitations on Cardano's current transaction size parameters, SundaeSwap's governance capabilities couldn't run entirely via smart contracts within the SundaeSwap protocol. As a result, SundaeSwap Labs' development team created a temporary governance category called Sundae DAO in Discord and a Governance forum to discuss and vote on governance proposals. 

Any critical decisions to be discussed may be subject to an informal staked community vote. Eventually, the DAO community will migrate away from Discord and utilize full smart contract-controlled governance accessed from the SundaeSwap interface once the Cardano network undergoes the Babbage HFC upgrades, which will increase Cardano's transaction size parameters.

SundaeSwap Team

The SundaeSwap team is public, which is always good for any trustworthy DeFi protocol. The team is made up of members with an impressive background with years of experience across multiple sectors. A full breakdown of the team can be found on the SundaeSwap Team Page.

CEO- Mateen Motavaf

Mateen has a varied background working in UI/UX design. He has worked at tech start-ups and ran two non-profit organizations that focus on research, publishing scientific papers, and meta-analysis. At SundaeSwap, Mateen maintains branding, business development, talent sourcing, and UI/UX design.

COO- Artem Wright

Artem has previous experience in finance and headed previous start-up companies in which his roles were focused around growth and strategy. 

CTO- Matt Ho

Matt is a veteran in the industry with over 25 years of experience bringing innovative products to market. Matt has previously held CTO and co-founding positions with FinTech start-ups. As a result, he brings a wealth of knowledge and expertise to the SundaeSwap team.

CIO- Pi Lanningham

Pi is a mathematician, software engineer and has an extensive background in leading teams of developers on highly sensitive projects. Pi has extensive experience building automated testing tools, communication protocols, query engines, and code auditing tools. The experience he brings to the SundaeSwap team is invaluable. Pi is an integral member contributing to the future success of the platform.

A Rocky Launch

While the launch of SundaeSwap was a momentous occasion and a day for celebrations, unfortunately, the launch did not go off without a hitch. Despite the fact that Cardano and SundaeSwap developers warned the community beforehand that as this was a beta launch, issues and network congestion and delays should be expected, many users still took to social media to display their anger and point blame towards the devs for all the issues.

It seems that for many, the launch was more bitter than sweet, with some tweets angrily expressing the fact that their swaps either failed completely, or they had to wait multiple hours or even days in some cases for the exchanges to complete.

The response from the SundaeSwap team was that while orders may take a while to process, everybody’s orders will be processed fairly and in the order that they were received.

It is important to note that these congestion issues were not the fault of the SundaeSwap team, as ultimately, it was the Cardano network that failed to support the sudden surge in volume and user activity of the network. However, as mentioned, Cardano developers were anticipating this to be a hurdle and hope congestion issues will be rectified with the Hydra upgrade later this year. You can dive into Cardano’s upgrades and roadmap in our Cardano article.

The SundaeSwap team have addressed the congestion issues and have stated:

“Our development team is working hard to squeeze as many transactions into a block as we can, and in a moment we’ll share at least one decision we’ve made to help with that. But more importantly, because frankly there is only so much we can do on the SundaeSwap protocol to optimize this, we are working closely with the team at IOG to safely accelerate the pace of parameter scaling on the Cardano mainnet to accommodate the now obvious demand for DeFi services on our blockchain.”

It wasn’t just an issue with congestion that plagued the launch either. To many Cardano users’ disappointment, the popular Yoroi wallet, which was supposed to be supported by SundaeSwap, was not. Of the two available wallets: Nami and ccvault.io, Nami wallet was reportedly not working for many users as there was a memory pool error. This left many users unable to use the Nami wallet, leaving only the ccvault wallet available.

Another issue that some users reported was that they could not cancel their pending orders. This was a significant issue as customers who initiated a swap at a specific price could not cancel after the transaction had been pending for hours. Everyone in crypto knows just how much prices can fluctuate in the span of a few hours. Another issue felt by first-comers to the platform was that users could not tell if their orders were within slippage tolerance. One user took to Twitter to complain that these issues lost him around 70k.

SundaeSwap have since announced that they have fixed many of these issues and users can now cancel pending orders.

Closing Thoughts

The SundaeSwap launch did mark a historic day for the Cardano ecosystem as the first DEX. It was an important milestone in building out the Cardano DeFi ecosystem.

While the platform did encounter a few snags at first, as new software launches often do, it was great to see the transparency of the SundaeSwap team in acknowledging the issues and the team’s ongoing communication with the community regarding pain points. The team acted quickly and professionally to keep everyone abreast of the situation and quickly rectify many of the problems. Since the first week of hurdles, the SundaeSwap DEX has been chugging along nicely. It has plenty of satisfied users and active trading activity.

I also need to tip my hat to the team as they embody the true spirit of DeFi and crypto. It is great to see strong and passionate teams behind these DEXs who are not just in it for themselves but care about and support the entire crypto industry. SundaeSwap has shown this with their reverse ISO proposal to further decentralize the Cardano network and their movement towards a community-controlled protocol. Just as Uniswap has become a foundational building block for the entire Ethereum ecosystem, I feel the SundaeSwap team have what it takes to fill those boots for Cardano. Once Cardano’s scaling solutions roll out later this year, and as SundaeSwap matures, I feel that this DEX has what it takes to go down in the history books.