What is a vampire attack in crypto?

Vampire attack, explained

With Halloween approaching, it’s the perfect time to delve into the concept of a “vampire attack” — but not the kind with fangs! In decentralized finance (DeFi), a vampire attack refers to a tactic where one protocol entices users away from a competing platform by offering more appealing incentives, effectively “siphoning” liquidity from the original platform.

Common targets include automated market makers (AMMs), decentralized exchanges (DEXs), non-fungible token (NFT) marketplaces and yield farming platforms.

A notable instance of this occurred between SushiSwap and Uniswap. In 2020, a DEX called SushiSwap executed a vampire attack against Uniswap. Liquidity providers (LPs) were incentivized to move their funds from Uniswap to SushiSwap, with the latter offering larger rewards. This strategy significantly accelerated SushiSwap’s early growth while draining liquidity from Uniswap.

Just like a vampire draining the lifeblood from its victim, SushiSwap drained Uniswap’s liquidity by offering a better deal. Such competitive strategies are still frequent since DeFi evolves quickly, but the aggressive vampire attack method is particularly notable for its boldness. 

Did you know? While SushiSwap’s controversial launch strategy, including Chef Nomi’s $14-million rug pull, tarnished its reputation, it ultimately helped Uniswap thrive. The rivalry attracted new liquidity, leading to the launch of Uniswap’s UNI (UNI) token, which captured the influx of funds and strengthened its competitive position.

Mechanism of a vampire attack

A vampire attack occurs when a new project incentivizes users of an established platform to migrate their liquidity by offering attractive rewards and marketing strategies.

Let’s learn how it works:

• Liquidity migration: A vampire attack aims to entice LPs away from a competitor platform. To earn fees, users typically supply liquidity to DEXs. In a vampire attack, a new platform encourages LPs to migrate their liquidity by offering better rewards, causing a “drain” on the original platform.
• Token incentives: The primary tactic in a vampire attack is offering token rewards. The attacking platform lures investors to transfer their money by offering a higher-yielding native token of its own. For instance, SushiSwap offered its SUSHI (SUSHI) token as an extra incentive on top of trading fees to pull LPs from Uniswap.
• Aggressive marketing: The attacking platform frequently uses aggressive marketing to showcase its better incentives, generate excitement, and encourage liquidity migration to assure success.

Impact of a vampire Attack

A vampire attack can have significant impacts on both the victim and the attacking platforms. 

Let’s explore these consequences in detail:

On the victim platform

• Loss of liquidity: This is the most immediate repercussion for the affected platform, as LPs have an incentive to move their assets to the attacking platform, reducing the potential for preserving effective trade and low slippage on DEXs. A rapid withdrawal of liquidity might negatively affect the platform’s functionality and reduce traders’ interest in it.
• Reduced competitiveness: The victim platform becomes less competitive as its liquidity declines, resulting in higher trading costs and poorer transaction execution for users. Furthermore, a decline in trading activity and user interest might damage the platform’s image, making it more difficult to draw in new users and liquidity. This may eventually lead to a downward spiral in which the platform finds it difficult to compete with rivals that are providing more incentives and high liquidity.

On the attacking platform

• Initial liquidity surge: A vampire attack frequently results in an initial liquidity boost for the attacking platform. Better incentives, including larger token awards, can help the platform draw in a lot of liquidity fast, increasing trading volume and its visibility inside the DeFi ecosystem. This increase in liquidity positions the platform as a strong rival to existing participants.
• Sustainability issues: While a surge in liquidity is beneficial in the short term, the platform must keep user interest consistent after initial incentives fade. If the rewards structure becomes unsustainable or the platform fails to deliver long-term value, liquidity providers may migrate to stabler options, putting the attacking platform at risk of facing a similar fate.

Defense against vampire attacks

DeFi platforms must take proactive measures to increase user loyalty and liquidity retention to protect against vampire attacks. 

The three key preventative steps include:

Improved incentives

Because vampire attacks rely on enticing away liquidity with larger token payouts, the victim platform could defend itself by providing comparable or even better incentives to LPs. 

This could entail boosting native token payouts, providing chances for exclusive staking, offering airdrops or launching loyalty schemes that incentivize the provision of long-term liquidity. A platform may reduce the incentive for LPs to migrate by regularly assessing and modifying rewards, which reduces the effect of possible vampire attacks.

Community engagement

Another effective line of defense is active community involvement. Active and devoted communities within DeFi projects give them a stronger defense against outside attacks. Platforms may establish stronger relationships with their users by encouraging openness, allowing users to vote on incentive structures and other governance issues, and cultivating a sense of ownership. 

Even when competitor platforms provide greater short-term incentives, community-driven platforms — where LPs feel a sense of ownership in the protocol’s success — are less likely to witness mass liquidity migration. 

Innovative features

Another important defensive tactic is to introduce novel features. A platform can set itself apart from the competition by providing new features and tools that entice users, as opposed to just responding to rivals. These might involve delivering novel DeFi products such as loan or yield farming, integrating with new blockchains, or offering sophisticated trading alternatives. 

A platform can become more than merely a venue for liquidity provision by providing a wider range of innovative services; by doing so, it can develop into an all-encompassing ecosystem that is more difficult to rival or replicate.

Legal and ethical considerations

Vampire attacks in DeFi raise ethical concerns about competition and fairness, as they exploit liquidity from original platforms, potentially undermining trust and collaboration within the decentralized finance ecosystem.

Although the DeFi industry is yet not heavily regulated, this does not mean that vampire attacks remain unnoticed. There may be concerns about unfair competition, market manipulation or intellectual property. For example, there may be legal grounds for action if proprietary code or trade secrets are copied or exploited, yet enforcement of laws is difficult because of the decentralized nature of these platforms.

Vampire attacks ethically bring into question the integrity and fairness of the DeFi ecosystem. Although competition fosters innovation, it may be argued that the original platform’s hard-earned user base is being undermined by the deliberate and aggressive siphoning of liquidity. Critics argue that this behavior fosters a short-term, zero-sum mindset where platforms compete against each other, potentially harming the reputation of the industry.

Therefore, competition must be balanced with ethical conduct. Platforms that participate in vampire attacks must balance the advantages of growth against the long-term effects on collaboration and trust within the broader DeFi community.