What is Vampire Attack
Definition of a Vampire Attack
The concept of a "vampire attack" in the crypto market is straightforward. It refers to a strategy where an attacker creates a protocol similar to the one they aim to compete with, but offers more attractive and profitable incentives. The goal is to drain or "suck" the market share or users from the target, just like a vampire.
Let's delve into this concept through two illustrative examples.
SushiSwap 🆚 Uniswap
Uniswap, an open-source AMM decentralized exchange. Basked in the market boon during the DeFi Summer of 2020, with the implementation of its V2 version, its Total Value Locked (TVL) grew from $70 million in June to $300 million by the end of August, establishing itself as a leading player in the DEX arena.
For more about Uniswap, check out our TokenWiki: What is Uniswap
However, Uniswap had vulnerabilities. It hadn't issued a governance token at that time, nor had it altered its incentive structure (the rewards for liquidity providers were only the transaction fees). This was a glaring weakness since liquidity providers supported the platform's operation, bore impermanent losses, but didn't benefit proportionally from the platform's rapid growth. Seeing this gap, an anonymous developer known as "Chef Nomi" took advantage.
Nomi launched SushiSwap, essentially a fork of Uniswap but introduced a pivotal new feature: a governance token (SUSHI) combined with liquidity staking rewards.
In SushiSwap, 0.25% of the trading fees would go directly to active liquidity providers, and an additional 0.05% would be converted into SUSHI, then distributed to SUSHI holders. This meant that liquidity providers could benefit not just from transaction fees but also from token rewards.
The catch was that SUSHI would be awarded only to those who provided liquidity in the form of Uniswap LP tokens. In essence, it was an invitation to Uniswap's users to participate in SUSHI mining.
The "Vampiric" Process
Staking contracts for SushiSwap and SUSHI distribution began on August 28, 2020, with aggressive initial rewards, boasting an APR as high as 1000%. Drawn by these incentives, users flocked to Uniswap to deposit assets into the qualifying pools (13 pools including USDC/ETH, SUSHI/ETH, etc.), obtained Uniswap V2's LP tokens, and promptly staked them in SushiSwap's contracts.
After 100,000 blocks (approximately two weeks), SushiSwap initiated its liquidity migration, transferring all the Uniswap LP tokens to SushiSwap, effectively draining Uniswap of its assets. By the time the migration was completed, SushiSwap had accumulated about $800 million in tokens, which accounted for about 55% of Uniswap's liquidity. Uniswap's TVL simultaneously plummeted by approximately $400 million.
In retrospect, SushiSwap forked Uniswap's architecture and introduced a new reward mechanism, creating an image "based on Uniswap yet superior to Uniswap." Lured by the incentives, users quickly moved their funds to SushiSwap. While Uniswap eventually countered by releasing its own token, UNI, SushiSwap managed to accumulate significant liquidity in a short span, becoming a top-tier DEX.
LooksRare 🆚 OpenSea
Last year, there was another notable vampire attack in the NFT market where LooksRare targeted OpenSea.
OpenSea is a comprehensive NFT trading platform where users can buy and sell a range of NFTs, including crypto art, game items, virtual real estate, domains, and financial products. The platform supports both ERC-721 and ERC-1155 format NFTs. It charges a 2.5% secondary transaction fee and up to 10% for initial minting.
Despite dominating a significant market share as an NFT platform, OpenSea faced criticisms from many users. Some issues include a non-unified payment method (users often had to switch between ETH and WETH for different transactions) and high fees. The main concern revolved around OpenSea's highly centralized organizational structure, being heavily reliant on traditional capital, thereby not fully embodying the decentralized ethos of Web 3.0.
Launched in January 2022, LooksRare is also an NFT trading platform. It took lessons from OpenSea's shortcomings and introduced several innovations:
- Mixed payment functionality using both ETH and WETH, allowing both to be used for bids and payments.
- Support for series bidding, which enhances the experience for buyers who value the theme of an NFT series rather than the details of individual pieces, eliminating the need for listing items one by one.
- A significant upgrade in fee structure and incentive mechanisms. LooksRare levies a 2% transaction fee on all trades and distributes these earnings to stakeholders of its native token. The platform aims to challenge OpenSea's dominance in the NFT sector by sharing the fees with its community.
Sounds familiar? Targeting the weaknesses of a leading project and then providing tailored solutions to better attract and retain users, that's the core idea of vampire attack.
The "Vampiric" Process
LooksRare employed a rather direct strategy for its vampiric process.
They systemically identified significant traders on OpenSea (those who had a cumulative transaction volume of over 3ETH in the past six months). These traders were then whitelisted for an airdrop of LooksRare's native token, LOOKS. However, to claim the LOOKS, these users had to first complete an NFT transaction on LooksRare.
This tactic effectively converted many of OpenSea's users into traders on LooksRare, catapulting LooksRare's market cap to $1 billion. The price of LOOKS also surged, reaching around $7, with a peak at $7.1.
For project teams, a "vampire attack" is akin to a devastating blow, pulling the rug out from under them and introducing volatility risks to the market. However, from the perspective of the entire crypto industry, this intense competition between projects might be a positive thing — it keeps everyone on their toes. In this regard, vampire attacks not only create potential for improving user experience but also help to mitigate the centralization risks of dominant projects monopolizing users and market share.
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