Vampire attacks in cryptocurrencies

I’m sure most of our readers have had a girlfriend or boyfriend at some point in their lives. The majority of crypto investors are male, and I’ll use the girlfriend example later. Let’s say you just got a new girlfriend, and for some reason, your best friend wants to take you both out to dinner. Given that he’s your friend, you don’t see any harm in that. However, while you’re at dinner, you notice that he’s signaling to your girlfriend, basically flirting with her. This is a metaphor for what SushiSwap did to Uniswap. They reached out to Uniswap’s liquidity providers, which is discussed more in the rest of the article.

What are the infamous vampire attacks?

Essentially, these are pools of funds that allow traders to trade. Traders only have to pay a very small fee to the investor who provided the initial funding so that they can make a trade. So it creates a win-win situation, the investor gets a return and the trader doesn't actually have to find anyone else to trade with. Simply put, a vampire attack is when a DeFi protocol takes advantage of a better interest rate to attract investors from another platform. The most famous vampire attack right now happened on SushiSwap, where they were able to offer one of the best liquidity provider rates to any investor on their platform. What this meant was that a lot of people withdrew their liquidity or funds from Uniswap and put them on SushiSwap.

A vampire attack attempts to extract three things from an otherwise popular protocol, which together can be called liquidity: money, users, and putting those two together — trading volume, which is important because it means fees, which are a return to investors.

So let’s look at how SushiSwap did it? Well, let’s get into a little story about SushiSwap. SushiSwap was created by an anonymous person who called himself Chef Nomi. Chef Nomi created a vampire attack by offering a native token called SUSHI as a reward for liquidity providers. He simply offered better interest rates. In fact, at the beginning, these rates were 1000 APR within a few hours of their launch, and over $150 million worth of tokens were invested in their platform. Now you might be wondering why would you spend so much time and money creating a protocol for traders if you can’t get anything out of it? You’re right, Chef Nomi is anonymous. He didn’t even gain fame, but part of the protocol gave his developer wallet about 10% of all SUSHI tokens, so he accumulated a lot of SUSHI tokens that were supposed to be used to further develop the protocol. Everyone was surprised when he traded $14 million worth of SUSHI tokens for Ether. It looked like “pulling the plug”, and it basically was. But at this point in time, it was actually one of the biggest deals ever, so everybody was confused, “Is this a pullback? What is he going to do with the money?” So here’s the answer to that question.

He created this site anonymously and worked really hard to make it big. This way he had $14 million, and when he cashed out, the price of Sushicoin plummeted by 73%. In fact, after this, the protocol still worked. So people could still trade their tokens and liquidity providers could still get rewards. But a lot of trust was lost, so Chef Nomi gave the ownership of SushiSwap to Sam Bankman-Fried.

Now look at what Sam did. He actually increased the rewards for SushiSwap providers and then tried to further develop the protocol. Since he was anonymous, he tried to increase trust. There is actually more to the story, although Chef Nomi came back and gave his $14 million back to the development fund, but that is for another article.

Moving on, are vampire attacks a good thing? Now you might think that SushiSwap taking all of Uniswap's customers is a bad thing, but just like someone taking your girlfriend, there are pros and cons to this. The upside is that competition leads to better rates for traders and liquidity miners. In your girlfriend's case, if someone says to your girlfriend "hey, you should go to the dark side" hopefully this will motivate you to be a better boyfriend and maybe even a better person overall, which is technically good for both you and your girlfriend.

Therefore, competition in the decentralized finance space is very beneficial in many ways. However, a bad feature of vampire attacks is that the tokens created by the platform are unpredictable. We don’t know whether the people who farmed the tokens will decide to dump them into the market, which will significantly reduce the price. In other words, vampire attacks can be malicious. By offering higher returns, investors can withdraw funds from truly beneficial protocols and deposit them in high-risk fraudulent protocols.

Original author: Sales Wallet

Contributors: Yofu, DAOctor @DAOrayaki

Original text: What is a Vampire Attack in Crypto?