Vampire attack in crypto: what is it and how does it work?

Let’s try to explain what the "vampire attack" concept is—but not exactly the ones with fangs. In DeFi, it is a strategy whereby one protocol attracts users from a rival platform—even outbidding them for better incentives, if you will—“sucking up” the liquidity of the former chain. The common targets are AMM, DEX, NFT marketplace, and yield farming platform.

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Notable Example: SushiSwap vs. Uniswap

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One of the most notable examples of vampire attacks is between SushiSwap and Uniswap back in 2020. SushiSwap performed a vampire attack on Uniswap by offering higher rewards to liquidity providers and lured them to shift their funds to SushiSwap. This approach jump-started SushiSwap's early growth by sucking Uniswap of liquidity. Like a vampire doesn’t leave its victim without having sucked its lifeblood, SushiSwap attracted the liquidity of Uniswap with the better deal, a competitive strategy still seen in today’s fast-moving DeFi ecosystem.

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Mechanism of a Vampire Attack

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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.

• Liquidity Migration: Vampire attacks are targeted at luring the LPs away from a competitive platform. Incentivizing LPs to migrate their liquidity by offering them better rewards, hence “sucking” the original of its liquidity, which, in turn, provides liquidity to DEXs looking for fees in return.
• Token Incentives: The attacking platform offers token incentives as the main tacticked approach to charming investors into transferring their funds by offering a high-yielding native token. For example, SushiSwap used its SUSHI token as an extra reward on top of the trading fees to lure in LPs from Uniswap.
• Aggressive Marketing: The attacker platform would make lots of noise in marketing its better rewards and create hype. This is where the magic will happen, and onboarding liquidity will be key for success.

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Impact of a Vampire Attack

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A vampire attack significantly impacts both the victim and the attacker platforms.

On the Victim Platform

• Loss of Liquidity: The afflicted platform stands to suffer from an eventual drawdown on liquidity that disrupts functionality and reduces trader interest since trading would not be as efficient while suffering increased levels of slippage.
• Reduced Competitiveness: With reduced liquidity, a victim platform becomes less competitive, leading to higher trading costs and dwindling user activity. This will further create difficulty in attracting new users and liquidity.

Initial Liquidity Spike on the Attacking Platform

• Immediate Liquidity Boost: The attacking platform often sees a surge in liquidity due to attractive rewards, boosting its trading volume and visibility within DeFi.
• Unsustainability of the Model: After attracting users through incentives, maintaining these rewards can be challenging. If the rewards become unsustainable or fail to deliver long-term value, LPs may leave, causing a similar liquidity drain for the attacker.

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Defense Against Vampire Attack

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DeFi platforms can defend against vampire attacks by proactively building user loyalty and retaining liquidity.

• Better Incentives: Offering superior token rewards, staking opportunities, airdrops, and loyalty programs for LPs reduces their motivation to switch to competing platforms.
• Community Involvement: Transparency, governance voting, and a sense of ownership encourage communities to remain loyal. Community-driven platforms, where LPs feel ownership in the protocol, face fewer risks of liquidity migration.
• New Features: Introducing new features, such as advanced DeFi products, cross-chain integrations, or specialized trading tools, can create a comprehensive ecosystem that’s difficult for competitors to replicate.

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Legal and Ethical Considerations

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Vampire attacks raise ethical questions about competition and fairness in DeFi. These attacks exploit established platforms' liquidity, which can damage trust and cooperation within the ecosystem. While DeFi is still largely unregulated, concerns about unfair competition and market manipulation persist. If proprietary code or trade secrets are copied, legal action may be possible; however, enforcement is challenging due to decentralization.

Critics argue that aggressive siphoning of liquidity fosters a zero-sum mentality, where competition can erode the industry’s reputation. Platforms engaging in vampire attacks must weigh short-term growth against ethical considerations to ensure long-term collaboration within DeFi.

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