What is a vampire attack in crypto?

What is a vampire attack in crypto?

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Understanding a vampire attack

Vampire attacks can be aggressive new project launches or less genuine events where illicit actors target established project communities. 

A vampire attack in crypto is when a new project — sometimes a fork of an established project — offers better incentives or rewards than the original. Key characteristics of a vampire attack include a new project aiming to outdo another project with very similar features or a project looking to steal competitors’ resources and customers who provide critical liquidity. 

An attack often involves a decentralized finance (DeFi) protocol or decentralized application offering better rates for the same service than a close competitor. These attacks often involve mechanisms like liquidity mining, staking rewards or lower transaction fees to entice users to switch from the original project to the new one.

A DeFi vampire attack could result in losing liquidity or even shuttering an existing project. The new project “sucks the life” out of the original project, which is why these events are called vampire attacks. 

The attacks aren’t necessarily scams or inherently malicious. In many cases, they are an aggressive and highly competitive growth strategy common in crypto, with some projects surviving the intense competition and others not.

How does a vampire attack work?

Vampire attacks often target projects that rely on users and the liquidity they provide, such as exchanges and yield farms. 

Certain projects are more likely to experience vampire attacks, such as those that rely on users and liquidity. These projects include decentralized exchanges (DEXs), automated market makers, nonfungible token marketplaces and yield farms. 

Attacks can target projects with high liquidity because the pool of capital is attractive to the new project. This is called liquidity pool exploitation. They can also target established communities that the new project can infiltrate and use for promotion. Projects with high fees and a lack of innovation are also attractive targets because the new project can undercut the old and offer new features and incentives. 

A new project conducting a vampire attack will ensure it offers high incentives, like airdrops and aggressive marketing to the existing project’s community. It will incentivize users to move their liquidity from the existing project and quickly try to increase their own liquidity pools and volume. Afterward, it will try to retain its new users. 

For example, if the attacker is a liquidity provider, it will offer highly competitive yield farming. If the attacker and its target is a staking service, then it will offer better staking rewards. 

Examples of vampire attacks

SushiSwap’s vampire attack on the Uniswap DEX is often regarded as the first vampire attack of note. 

SushiSwap’s attack on Uniswap

SushiSwap is a Uniswap fork that attacked Uniswap when it launched the SushiSwap (SUSHI) token. SushiSwap promised a higher return on investment and targeted specific pools on the Uniswap DEX, where known users sought high yields. 

SushiSwap gained some market traction, but Uniswap survived and thrived. SushiSwap later became the target of ForkDelta in March 2022, resulting in a loss of over $100 million in liquidity on the platform.

Dash and new subsequent masternode projects 

Dash pioneered the masternode concept but was quickly followed by competitors who copied its functionality. Several initiatives forked the Dash protocol and subsequently customized it to compete directly in the market. Attackers included PivX, SmartCash, ZCoin and Dash Diamond. 

The implications of a vampire attack

Attacks can lead to greater competition and encourage projects to innovate and work harder to retain customers. However, they can also damage the market and steal user funds. 

Vampire attacks in crypto, particularly highly aggressive ones that copy existing projects closely, can be seen as unethical and unfair. However, increased market competition can also serve to weed out projects that aren’t serving users with the best incentives and are not innovating but simply capturing a market. 

During an attack, an existing project may lose so much liquidity that it cannot operate and ceases to function. Less severe attacks can reduce a project’s customer base so much that it can’t innovate or compete long-term. To recover from an attack, a project might need to be equally aggressive to win back users. 

Competition can ensure project users get the best deals, preventing projects from taking advantage of a captive market where users have little choice, charging unfair fees or simply taking profit without reinvesting into better products or services. Vampire attacks can be the start of new projects that can increase yields and incentives available. 

On the flip side, excessive competition can see users moving quickly to new projects that seem attractive on the surface. These new projects can be scams, hacks or other illicit schemes where users will lose their money entirely.

How to protect against crypto vampire attacks

Both existing crypto projects and crypto users can protect themselves against falling victim to vampire attacks.

The simplest way for crypto projects to protect against less aggressive vampire attacks is to be competitive with healthy incentives, reward loyal users and innovate to offer the best features. 

There are more specific measures a project can employ to protect users and liquidity. This includes lock-in periods that prevent users from easily withdrawing liquidity after receiving incentives, thus ensuring their commitment to the platform. Similarly, liquidity token withdrawal restrictions limit how much users can withdraw within a specified timeframe, discouraging mass exits. 

Token vesting schedules distribute rewards gradually, safeguarding platform liquidity. Dynamic rewards further incentivize user loyalty and engagement. Incorporating decentralized autonomous organizations or granting voting rights fosters user involvement in governance, enhancing loyalty. 

Additionally, security audits, community building and reputation management strategies bolster a project’s appeal and credibility, making it more resistant to competition. Collectively, these tactics reinforce user commitment and trust, which are crucial for the sustained success of decentralized platforms.

Crypto users and investors can also protect themselves against vampire attacks by being aware of new project tactics. For example, new DEXs offer very high incentives in return for liquidity.

Moreover, savvy investors and crypto users should always conduct extensive research and due diligence to ensure they don’t fall victim to scams.