Klaytn blockchain network’s newest decentralized finance (DeFi) initiative, KLEX Protocol, has initiated a vampire attack to attract deposits from competing DeFi protocol KLAYswap. Per an official tweet, KLEX launched the vampire attack on August 29th, allocating $600,000 worth of KLAY tokens and 15 million KLEX tokens as incentives to lure users and investors away from KLAYswap.
In the context of DeFi, a “vampire attack” is a technique where one DeFi protocol offers better rates of returns than another, helping attract customers and investors. Just like a bank may offer higher interest rates on deposits to attract users from other banks, DeFi engages in similar practices. The underlying point of a vampire attack is creating powerful incentives for liquidity providers to migrate their liquidity to another platform.
KLEX’s ongoing vampire attack reflects the protocol’s drive to amass as much liquidity in the form of deposits as possible by offering the highest rates of return for DeFi depositors in the Klaytn blockchain ecosystem. Users who migrate and deposit funds into the liquidity pools can take advantage of these returns. Deposits for the ongoing “vampire attack” will remain open for 48 hours, wherein participants can choose to deposit their funds across several liquidity pools.
Using “Vampire Attacks” to Drive Liquidity
Vampire attacks are gradually gaining prominence in the blockchain ecosystem as a potential marketing tactic. DeFi applications and protocols rely on liquidity to operate; without any trading activity, a liquidity pool eventually dries up.
Through a vampire attack, a newly-created project aims to attract liquidity, users, and trading volume from other already established platforms. The first step of a vampire attack is to offer high incentives to liquidity providers currently using different platforms to deposit their liquidity pool (LP) tokens in a new platform.
One of the most famous vampire attacks in DeFi was performed by SushiSwap. Although it was an offshoot of Uniswap, SushiSwap implemented a more advantageous incentive mechanism to attract liquidity providers searching for the best rates of return.
Built by the anonymous “Chef Nomi,” SushiSwap positioned itself as the decentralized and community-governed alternative to venture capital-funded Uniswap. At that time, Uniswap was growing swiftly by offering liquidity providers LP tokens for providing liquidity on its platform. Post-launch, SushiSwap started offering additional incentives in the form of SUSHI tokens to liquidity providers who would stake Uniswap’s LP tokens on SushiSwap, which initially saw yields as high as 1000% APR.
SushiSwap’s vampire attack on Uniswap was so successful that within just a couple of hours of the launch, more than $150 million worth of LP tokens were deposited in its newly established liquidity pools. Just 11 days after launch, the total value locked (TVL) touched $1.8 billion. Meanwhile, as Uniswap’s liquidity providers migrated their LP tokens into SushiSwap, it drained around $800 million worth of Uniswap’s liquidity.
Other similar instances include Swerve protocol launching a vampire attack on Curve.fi, where it drained nearly $400 million from the latter’s TVL in a matter of days.
