What is a vampire attack in crypto?

Understanding vampire attacks

Vampire attacks can be violent new project launches or real events where illegal actors target established project communities.

In crypto, a vampire attack 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 another project with similar characteristics or a new project that aims to steal competitors' resources and customers who provide critical liquidity.

An attack is often a decentralized finance (DeFi) protocol or decentralized application that offers better value for the same service than its closest competitor. These attacks often include tricks like liquid mining, collecting rewards or low transaction fees to trick users into switching from the original project to the new one.

A DeFi vampire attack can result in loss of liquidity or even shutdown of an existing project. The new project “squeezes life” from the first project, which is why these events are called vampire attacks.

The attacks are not necessarily fraudulent or malicious in nature. In most cases, aggressive and highly competitive development strategies are common in crypto, some projects survive strong competition and others do not.

How does a vampire attack work?

Vampire attacks often target user-based projects and the liquidity they provide, such as exchanges and farms.

Certain projects, such as those dependent on users and liquidity, are more vulnerable to vampire attacks. These projects include decentralized exchanges (DEXs), automated market makers, fickle token marketplaces, and product farms.

Because capital stock is attractive to new projects, attacks can target highly liquid projects. This is called liquid pool exploitation. The new project can target established communities that can be infiltrated and used for advertising. Projects with high pay and a lack of innovation are also attractive targets because the new project offers new features and incentives while reducing the old.

A new project running a vampire attack will ensure that it provides significant incentives such as airdrops and aggressive marketing to the existing project community. It encourages users to move their liquids from an existing project and quickly try to increase their own liquid pools and sizes. It will then try to retain its new users.

For example, if the attacker is a liquid supplier, it offers highly competitive farming. If the attacker and the target are of stacked service, then it offers better stack rewards.

Examples of vampire attacks

Sushi Swap's vampire attack on the Uniswap DEX is often considered the first vampire attack of note.

Sushiswap attack on Uniswap

SushiSwap is a Uniswap fork that attacked Uniswap when the SushiSwap (SUSHI) token was launched. Sushi Swap promises high returns on investment and targets certain pools on the Uniswap DEX where known users are looking for high yields.

SushiSwap found limited market demand, but UniSwap survived and grew. Sushi Swap later became the target of a Delta fork in March 2022, causing a liquidity loss of over $100 million on the platform.

Dash and new follower masternode projects

While Dash pioneered the masternode concept, it was quickly followed by competitors who copied its functionality. Several initiatives fork the Dash protocol and later customize it to compete directly on the market. The attackers include PivX, SmartCash, ZCoin and Dash Diamond.

Implications of a vampire attack

Attacks lead to intense competition and encourage them to create projects and work harder to retain customers. However, they can disrupt the market and steal users' money.

Vampire attacks in crypto, especially aggressive ones that closely copy existing projects, can be seen as unethical and unfair. However, increased market competition helps eliminate projects that do not serve consumers with the best incentives and are not innovative but simply capture the market.

During the attack, an existing project may lose so much liquidity that it becomes inoperable and ceases operations. Less serious attacks reduce a project's customer base, so it can't create or compete in the long run. To recover from an attack, a project must be equally aggressive in recovering users.

Competition ensures that project users get the best deals, which prevents project users from exploiting a captive market with little choice, paying unfairly, or simply taking profits without reinvesting into better products or services. Vampire attacks can be the start of new projects that increase the profits and incentives.

On the flip side, excessive competition can see users moving quickly to new projects that look attractive on the surface. These new projects can be scams, hackers or other illegal schemes where users lose their money completely.

How to protect against crypto vampire attacks

Both existing crypto projects and crypto users can protect themselves from becoming victims of vampire attacks.

The easiest way for crypto projects to defend against the attacks of less powerful vampires is to compete with healthy incentives, reward loyal users, and innovate to offer great features.

There are more specific measures a project can use to protect users and cash flow. This includes lock-in periods that prevent users from easily withdrawing liquidity after receiving incentives, thereby ensuring their commitment to the platform. Similarly, liquidity token withdrawal limits limit how much users can withdraw within a certain time frame, encouraging mass withdrawals.

Token overlay programs distribute rewards gradually, maintaining platform liquidity. Dynamic rewards further encourage user loyalty and engagement. Incorporating decentralized autonomous organizations or giving them the right to vote can increase user participation in governance and increase trust.

Additionally, security audits, community building, and reputation management strategies can strengthen a project's appeal and credibility, making it more resilient to competition. Overall, these methods strengthen the commitment and trust of users, which are critical to the sustainable success of decentralized platforms.

Crypto users and investors can protect themselves from vampire attacks by knowing new project strategies. For example, newer DEXs offer much higher incentives in return for liquidity.

Moreover, prudent investors and crypto users should always do extensive research and due diligence to avoid falling victim to scams.