Staying cautious while searching for new GEMs is the main rule of the crypto market and the recent popularisation of vampire attacks has proved that once again. 🧛
What is a vampire attack?
“Vampire attack” is a blockchain project’s user attraction strategy, relying on a more popular competitor. The app’s creators present a product with similar features, but better token rewards.
How does that work?
A typical vampire attack has three stages:
- Finding the ancestor project. 🔎
- Creating an analogue by stealing the business model, architecture or the code. 👾
- Making excessive economic incentives the main selling point. 👎
The result is usually "sucking"users and their capital from the victim - some popular protocol.
Vampire attack strategy originated in the decentralized finance (DeFi) space. The source code of DeFi applications or at least its base, is usually open source. Thus, a similar application is quite easy to recreate and launch with only minor changes. 😡
In addition, copycat developers can issue their own governance tokens and use those to inflate the profitability of liquidity farming, which is a standard way for users to earn money. 👨🌾
The biggest cases
Even though the attack doesn’t sound too malicious, a player like Uniswap got affected. 🦄
In 2020, the Uniswap DEX started rapidly gaining popularity. By the beginning of September 2020, daily trading volume of the protocol reached a point of $1.8 billion, showing great competition to the leading centralized crypto-trading platforms. 📈
Against this background, a project called SushiSwap appeared. The anonymous creators weren’t even trying to the fact that the new protocol was a Uniswap fork. However, SushiSwap had a major difference - its own SUSHI token, received as a reward for pool farming. 🍣
Nowadays, almost every decentralized exchange has a governance token, but that wasn’t a common practice by the time. ⏳
The SushiSwap team was offering attractive conditions for liquidity providers: due to users being rewarded in SUSHI, participating in the exchange pools brought hundreds and even thousands percent of annual profit. As a result of that vampire attack, Uniswap users transferred more than a billion worth of funds to SushiSwap in just a couple of weeks, reducing the amount of blocked liquidity (TVL) in the original Uniswap dApp by 70%. 🤦♂️
However, the situation didn’t last for too long - high farming speeds of SUSHI led to a sharp inflation of the price. Consequently, the profitability of SushiSwap pools had quickly decreased too. By mid-September, Uniswap had already returned to the DeFi leaders in terms of TVL. A little later, the UNI governance token was introduced, finally nullifying the advantage of SushiSwap. ✅
That situation, however, caused thousands to lose money, so when you see a profitable copy of a project you are familiar with, do your research first.
Stay tuned 📻