What is a vampire attack in crypto?

Vampire attack, explained

As someone who has closely observed the dynamic evolution of the decentralized finance (DeFi) landscape, I can confidently say that vampire attacks are a double-edged sword in this rapidly growing ecosystem.

As Halloween draws near, I find myself delving into an intriguing financial concept – the “vampire strategy,” but not the blood-sucking kind! In the world of Decentralized Finance (DeFi), a vampire strategy refers to a tactic where one platform lures users away from a rival by offering more attractive incentives, essentially draining liquidity from the initial platform.

Among the usual focuses are platforms like Automated Market Makers (AMMs), Decentralized Exchanges (DEXs), NFT marketplaces, and Yield Farming environments.

2020 saw an intriguing incident involving two Decentralized Exchanges (DEX), SushiSwap and Uniswap. In a move referred to as a “vampire attack”, SushiSwap targeted Uniswap by enticing Liquidity Providers (LPs) to shift their assets from the former to the latter. SushiSwap provided more attractive rewards, which fueled its rapid expansion in the early stages at the expense of Uniswap’s liquidity.

In much the same way as a vampire siphons vital essence from its prey, SushiSwap effectively depleted Uniswap’s liquidity reserves by offering more attractive terms. This competitive tactic is common in the rapidly advancing DeFi landscape, but SushiSwap’s bold “vampire attack” method stands out for its audacity.

Fun fact! Although SushiSwap’s questionable debut tactics, such as Chef Nomi’s $14-million exit scam, negatively impacted its image, it inadvertently boosted Uniswap. The competition between the two platforms drew fresh liquidity, ultimately leading to the introduction of Uniswap’s UNI token (UNI). This new token effectively captured the influx of funds, solidifying Uniswap’s competitive edge.

Mechanism of a vampire attack

As a researcher examining this scenario, I find that a ‘vampire attack’ transpires when a novel initiative entices the user base of an existing platform to transfer their liquidity through alluring incentives and effective marketing tactics.

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

To maintain user loyalty and prevent draining of resources, Decentralized Finance (DeFi) platforms should actively implement strategies that encourage long-term engagement and liquidity preservation, shielding themselves from ‘vampire’ threats.

The three key preventative steps include:

Improved incentives

Since vampire attacks involve luring away liquidity through higher token rewards, a victim platform could protect itself by offering similarly attractive or even more lucrative incentives to Liquidity Providers (LPs).

This might involve increasing rewards for native tokens, creating opportunities for exclusive staking, distributing airdrops or establishing loyalty programs that motivate the supply of long-term liquidity. A platform can discourage LPs from moving to other platforms by frequently evaluating and adjusting rewards, thereby minimizing the impact of potential “vampire attacks.

Community engagement

An engaged community participation is another robust strategy for defense. Actively involved communities within DeFi projects provide them with a more robust defense against external threats. Platforms can build stronger ties with their user base by promoting transparency, enabling users to vote on reward systems and other governance matters, and fostering a feeling of ownership.

In contrast to competitor platforms that may offer more immediate rewards, platforms built on community engagement tend to retain their liquidity longer because participants often develop a strong sense of ownership towards the platform’s prosperity, making them less prone to large-scale migrations.

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. 

As an analyst, I would rephrase the statement as follows: By expanding our offerings beyond just a marketplace for liquidity, we can transform this platform into a comprehensive ecosystem teeming with innovative services. This transformation makes it increasingly challenging for others to rival or imitate what we’ve built.

Legal and ethical considerations

Concerns about ethics arise when certain entities in DeFi are seen as preying on others, using strategies that could be considered exploitative and unfair. These actions, often likened to vampiric attacks, drain liquidity from initial platforms, which may erode trust and cooperation within the decentralized finance community.

In the Decentralized Finance (DeFi) world, where regulation isn’t as stringent, incidents like ‘vampire attacks’ don’t go unnoticed. These concerns involve issues such as unfair competition, market manipulation, and even intellectual property rights violations. For instance, if proprietary code or trade secrets are illegally copied or utilized, there could be potential legal recourse. However, the challenge lies in enforcing these laws due to the decentralized architecture of these platforms.

In simpler terms, when a vampire (a metaphor for a DeFi platform) preys on users or resources, it casts doubt on the honesty and balance within the Decentralized Finance (DeFi) system. While competition can lead to new ideas, it’s questionable if some platforms are unfairly taking advantage of the user base built by the original platform through intentional and aggressive draining of liquidity. Critics claim that this practice promotes a short-term, winner-takes-all mentality among platforms, which could negatively impact the DeFi industry’s reputation.

Consequently, fairness should go hand in hand with competition. It’s crucial for platforms to weigh the short-term gains from aggressive practices against their impact on partnership and credibility within the wider Decentralized Finance (DeFi) network.