The topic for today’s post is going to be vampire attacks. These are an interesting event that occurs in Decentralized Finance (DeFi) when one protocol drains liquidity from another. These are not necessarily a bad thing, but it’s definitely something to understand what is happening before you dive into one.
For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advice.
To understand a vampire attack, you need to understand a little bit about what liquidity pools are. If you want to know a little more than this brief overview, feel free to click the link there to my full article on the subject which gets a little more in-depth.
Basically, a liquidity pool lets users provide up pairs of tokens into a pool, to facilitate trading between those tokens. The users that provide the tokens are called liquidity providers, and they get benefits in terms of a piece of the trading fees that are charges for trades going through the pool, as well as potentially other rewards, depending on the platform and pool.
The liquidity pool is the blood that flows through the Automated Market Maker (AMM), which itself is the heart of the entire Decentralized Exchange (DEX). It controls the market price and depth, and the more value locked in the pool, the more volume it can handle while taking lower price hits.
A vampire attack is when one Decentralized Finance (DeFi) project drains the liquidity from another. Well, liquidity, users and ultimately trading volume actually, but one tends to follow the other. The new project will offer better incentives to the users of the old one, as a way to get them to withdraw their provided liquidity on the old platform and move it to the new one.
This gives the new platform the ability to use that liquidity to power their own Automated Market Maker (AMM). letting them drive up their users and more importantly their trading volume. The end goal of course is over taking the older project in terms of total value locked, or at least to secure enough of it to be a contender in the space, with the actual prize being those sweet, sweet, trading fees.
One way they incentivize users to move their liquidity would be by offering up their native tokens for people staking liquidity there, such as the SushiSwap (SUSHI), which was the driving force behind the most well known vampire attack, when SushiSwap drained a large amount of liquidity out of Uniswap.
There are of course good and bad points of a vampire attack. At the surface level, it may seem like it’s just bad to go after another platform’s users like that, but it’s literally the way business works, and competition is actually a very good thing, as it forces all sides to continue to innovate and offer up incentives to keep their users. If one platform just dominates and there is never any viable competition, we just end up in the same state of affairs the world is trying to get away from with Decentralized Finance (DeFi).
And of course, as with all things in Decentralized Finance (DeFi), there is a great risk. To participate in a vampire attack, even as just a user and not part of the development side of things, would require you to take your liquidity out of, presumably, a stable and well established protocol, and put it into a new, untested one, for a greater reward. But with great reward, comes great risk, so you have to keep that in mind.
You also have to keep an eye out for bad actors, or someone trying to pull a scam, as it would be very easy to tempt people over to a new platform with native tokens, and then perform a rug pull on the users. It kind of happened with SushiSwap when Chef Nomi sold $14,000,000 worth of SushiSwap (SUSHI) from the dev wallet and crashed the price of the token. He later returned it, and the protocol survived, but it could have very well gone belly up and everyone left holding their proverbial bags.
I think the term vampire attack just sounds far too negative for what this actually is. Potential Healthy Competition. I say potential, because, as with everything crypto related, you need to Do You Own Research on any project you are thinking of getting into.
If we take scams and bad faith actors off the table, and we just assume for a minute that everyone really is trying to make everyone money and the world a better place, then all a vampire attack boils down to is a competition between a new and old protocol, with the victor being the one that can offer their users the best value for their money.
It is of course a risky venture, even under the conditions of everyone is playing in good faith, and any investment you make in any new platform can more easily go to zero than it can “go to the moon”, but that goes for every project in crypto space, and really, any investment just in general, so never bet more than you’re willing to lose, even if you think you found a “sure thing”.
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Want some more content right now? Check out some of my previous posts:
Ethereum Fee Burn (EIP-1559)
Liquidity Pools
Impermanent Loss
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Originally Posted On My Website: https://ninjawingnut.xyz/2021/07/06/vampire-attacks/
