After entering the world of DeFi, people may encounter a shared experience of suddenly being faced with an overwhelming amount of terminology. Among them are some vivid and special terms that leave a deep impression, and “vampire attack” is one such representative term.

A vampire attack is a practice of increasing one’s own value by taking away the liquidity of the target. The attack’s name and method originated from the attack that SushiSwap launched against UniSwap in August 2020.

Introduction

Just like the popular image of vampires, the vampire attack scene includes several roles: the attacker (vampire), the victim, and the often overlooked important element, the thing being taken (blood, or liquidity). From these three elements, we can explain the nature of the “vampire attack” and have a look at some historical cases in the DeFi world.

• Attacker:

  Usually, the party that initiates the vampire attack has already targeted the victim for quite some time and designed a powerful and effective way to attack the target’s specific value and weaknesses to achieve the blow. If the attack is successful, the attacker will be able to obtain the specific value of the target in a very short period of time at a great cost to the attacker.

• Victim of the attack: \
  The victim is usually a pioneer in a dominant position in a specific market field, attracting the attention and attack of latecomers (attackers) because of having the most value. Through a specific mechanism, the attacker transfers some of the victim’s current value to themselves. Without a proactive response to the attack, the attacker is likely to successfully capture a considerable amount of value and claim a significant portion of the market share.

• The asset being extracted:
  In cryptocurrency, this refers primarily to liquidity. Here we need to explain further what liquidity means and why it is important for DeFi projects or other blockchain protocols and services.

The term liquidity refers to the ease with which an asset can be bought or sold without affecting its price. High liquidity for a particular cryptocurrency means that it is efficient to convert it into cash (or stablecoin) or other assets, with little risk of affecting exchange rates. Low liquidity, on the other hand, indicates that the asset is more difficult to convert into cash or other assets.

Case Introduction

• Case 1: SushiSwap vs Uniwap

The first vampire attack in history was launched by SushiSwap. SushiSwap is a DEX (decentralized exchange) built on Ethereum.

A DEX allows users to trade without going through the KYC process (identity verification). Although it is anonymous, all transaction records are still retained on the blockchain.

In order to enable the automatic matching of trades, most DEXs build AMM (Automated Market Maker) liquidity pool platforms through on-chain smart contracts. It pre-defines asset prices based on the ratio of tokens in the pool through algorithms and enables users to trade automatically. To provide liquidity, AMM provides incentives (usually a proportion of transaction fees) to users who put funds into the pool for everyone to exchange.

SushiSwap was established in August 2020 and used the means later known as the vampire attack to attack the most popular DEX on the market at that time, Uniswap.

The carefully planned attack process of the SushiSwap team goes as follows:

• The anonymous developer Chef Nomi of SushiSwap, created a funding pool on Uniswap, ready to suck funds from Uniswap’s pool.
• The way of sucking funds is that SushiSwap provides a more favorable interest rate in its own funding pool to attract Uniswap investors to transfer funds to SushiSwap.
• As investors transferred funds to SushiSwap, Uniswap’s total locked-in value (TVL) plummeted by about $400 million.
• Then, SushiSwap’s developers sold the funds they sucked from the Uniswap pool on Uniswap to make a profit.

Results：

• SushiSwap successfully attracted a large number of investors and funds, i.e. liquidity, and became a popular AMM platform.
• SushiSwap’s developers earned a large amount of profit.
• However, in the following months, SushiSwap’s financial situation and governance structure were questioned, resulting in a decline in market share. After the FTX bankruptcy, its market share declined further due to the relationship between Sam Bankman-Fried (SBF) and SushiSwap.
• Although SushiSwap is still quite active, it has not yet shaken Uniswap’s dominant market position.
• Case 2: LooksRare vs OpenSea

OpenSea is the largest NFT trading center globally, founded in December 2017 and backed by Y Combinator, a US-based startup incubator company. With the onset of the NFT boom in recent years, OpenSea has become the largest NFT trading center in the world, with millions of users and billions of dollars in trading volume. As a result of this market-leading position, OpenSea became the target of competitors such as LooksRare.

LooksRare is a new NFT trading platform established in January 2022. To attract NFT traders, LooksRare conducted a vampire attack against OpenSea by distributing 120 million LOOKS tokens to OpenSea users who had traded NFTs worth at least 3 ETH in the previous six months. Although this only accounted for 12% of the total LOOKS token supply, users were required to conduct NFT transactions on LooksRare to receive the airdrop and could decide to stake their rewards for more benefits afterward. This strategy successfully attracted NFT traders to LooksRare and took advantage of OpenSea’s market position.

Despite LooksRare’s trading volume being almost double that of OpenSea, the latter has nearly 40 times more active users, indicating that the trading volume on LooksRare is generated by a small number of traders frequently conducting “fake trades” to gain rewards. This has cast doubt on LooksRare’s future development in the community. Nevertheless, LooksRare continues to develop new features such as feeless peer-to-peer trading and single-quote NFT series, as “real trading volume” continues to increase.

Although the 12% airdrop of LOOKS tokens had a significant advertising advantage and attracted many users, it also brought severe risks to the platform’s associated assets. This situation reduces the platform’s control over its related assets, and if users sell their LOOKS tokens in large quantities on the exchange, it could cause the LOOKS token price to fall, further reducing its value and attractiveness.

• Case 3: x2y2 vs Opensea

After a month of LooksRare’s attack, another NFT trading platform newcomer x2y2 also launched a vampire attack on OpenSea. Although there were technical issues with the airdrop in the first few days of the attack, leading to community backlash, x2y2’s users still grew by more than 8 times in the seven days after the attack.

However, as token holders quickly took profits (selling x2y2 tokens for other cryptocurrencies), x2y2’s token price quickly fell back to pre-attack levels, and OpenSea’s market position remained unshakable.

Although the general approach is similar to LooksRare’s, x2y2 still learned from some of LooksRare’s experiences and adjusted some details. First, x2y2’s airdrop applies to all wallets that traded on OpenSea before January 2022 (about 860,000 wallets), significantly expanding the attack range compared to LooksRare’s method. Second, in order to reduce “wash trading” to earn rewards, x2y2 traders did not receive reward feedback linked to transaction volume, and all rewards came from staking x2y2 tokens. According to official data, 65% of tokens have been designated for staking rewards, which also demonstrates x2y2’s emphasis on staking.

Conclusion

In the world of DeFi, vampire attacks are often perceived as a consequence of intense market competition, where participants are in constant pursuit to enhance their own worth and outdo others. This underscores the significance of comprehending the intricate workings of DeFi and being equipped to adapt to swiftly evolving market scenarios. Whether as individuals or organizations, novel ideas such as vampire attacks serve as a reminder to remain watchful and attentive in the ever-changing DeFi domain and to stay abreast of emerging concepts and technologies.