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SushiSwap and Vampire Attacks in Decentralized Finance (DeFi)

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SushiSwap and Vampire Attacks in Decentralized Finance (DeFi)

SushiSwap — which rapidly moved billions of dollars of value in the market — became the “vampire attack” that changed the DeFi community.

Gemini-Category Security 3

Summary

In 2020, a pseudonymous developer forked Uniswap to create SushiSwap — a near clone protocol that added “community-oriented” features like a governance token and staking rewards to Uniswap’s original code on its own platform. Seeking to gain users and liquidity, SushiSwap mounted a vampire attack on Uniswap, siphoning liquidity on the order of billions of dollars from its competitor, and altering the landscape of decentralized finance (DeFi) in the process.

Uniswap is one of the world’s largest decentralized finance (DeFi) platforms, and like most projects in the Ethereum ecosystem, it has an open-source protocol. In August 2020, a pseudonymous developer named Chef Nomi forked the code of Uniswap to create a rival clone: SushiSwap. But don’t let the playful kitchen visuals of chefs, forks, and sushi suggest that the event was just a meme. SushiSwap was a lightning rod event, and very quickly moved billions of dollars’ worth of value in the DeFi market. This strategy — dubbed a “vampire attack” — has become a case study in the nature of competition and market forces in the still-nascent DeFi sector of the blockchain industry.

What Is a Vampire Attack?

To understand vampire attacks, you must first be familiar with the fundamentals of automated market makers (AMMs), which are a type of decentralized exchange (DEX). AMMs use liquidity pools — which are collectivized pools of tokens locked in smart contracts — to facilitate the permissionless trading of assets. Unlike a traditional market where buyers and sellers trade with each other, AMM users trade against liquidity pools. The tokens in the liquidity pools are provided by users who, in return, earn a liquidity provider (LP) token that represents their share of the pool. AMMs that have sufficient liquidity are attractive to traders because they can execute larger and faster transactions with lower fees.

When forking the Uniswap code, Nomi recognized that liquidity was essential to making SushiSwap a success. It would be difficult to incentivize users to provide liquidity to a new platform when they could provide it to Uniswap, an established and tested protocol. Because of this, Nomi specified that SushiSwap would offer users two rewards for providing liquidity: First, they would receive SUSHI tokens upon depositing tokens to SushiSwap, and second, they could receive a portion of the protocol’s total fee revenue by staking those SUSHI tokens. Users could therefore earn more revenue by providing liquidity to SushiSwap than providing liquidity to Uniswap.

Importantly, however, users could not deposit just any token to start earning SUSHI — they had to deposit Uniswap LP tokens. Nomi planned to use the deposited Uniswap LP tokens to siphon liquidity from Uniswap. This process — the draining of liquidity from Uniswap to SushiSwap — was dubbed a “vampire attack” or “vampire mining.”

Many users quickly flocked to Uniswap to deposit assets and receive LP tokens, which they then transferred to SushiSwap. Uniswap’s deposits rapidly increased from $300 million to $1.8 billion USD. By the time the migration was over, SushiSwap had gained $810 million worth of tokens — roughly 55% of Uniswap’s liquidity. While the strategy was polarizing, it did not signal the end for Uniswap — quite the opposite, in fact.

Prior to SushiSwap’s launch in August 2020, there was approximately $185 million locked in Uniswap liquidity pools. Uniswap experienced dramatic volatility in the run-up to the migration — up to $1.8 billion then down to $400 million in three days as funds were contributed and then siphoned to SushiSwap. Despite this, the event brought so much value into the DeFi ecosystem that Uniswap’s locked token value rebounded to more than $3 billion during the next two months.

Uniswap then released its own governance token, UNI, to re-incentivize its own community’s engagement. The release was a catalyst for the sustained growth of Uniswap since the episode, while SushiSwap has shown remarkable signs of platform growth in its own right. 

How SushiSwap Changed the DeFi Community

SushiSwap’s vampire attack of Uniswap sent a clear message to other leading DeFi protocols. If they did not meet the community and industry’s expectations, they could be forked. It became starkly clear that the DeFi community is both dynamic and capable of pursuing an activist agenda — one that can easily be redirected to competitors that offer more agreeable economic incentives and governance. Case in point: Since launching the UNI token, Uniswap has regained its place at the top of the DeFi stack, and the entire ecosystem is stronger than ever.

The SushiSwap vampire attack phenomenon highlighted several emergent trends in the DeFi ecosystem. First, projects have come under pressure to decentralize and cede control of their protocols to their communities — a process usually enacted by introducing governance tokens that platform users can utilize to vote on the platform’s future. Secondly, as evidenced by platforms like Yearn.finance, the DeFi community has increasingly called for “fair launches” of governance tokens, in which no one entity — including project founders — has an unfair advantage in obtaining tokens.

By introducing a polarizing new business strategy at a large scale with its vampire attack on Uniswap, SushiSwap changed the dynamics of the DeFi community — and perhaps the entire blockchain industry. Although SushiSwap might be the first project to execute such an attack, it likely will not be the last. SushiSwap’s vampire attack highlights the dynamic relationship between decentralized networks, open-source projects, and a distributed global community of active investors and speculators. The interactions among these players are defining and changing the parameters of what is still a very new and exciting sector of finance.

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