What Doesn't Kill You Makes You Stronger? Evidence from Vampire Attack on Decentralized Exchange

The cryptocurrency (crypto) market has grown dramatically over the past decades since the emergence of the Bitcoin protocol in 2008. Traditionally, blockchain users would trade cryptos on centralized exchanges such as Binance, OKex, and Huobi. Decentralized exchanges (DEXs), exchanges that allow blockchain users to directly buy and sell cryptos on the chain without involving custody of traders’ crypto assets, started to blossom recently with the trading volume on DEXs reaching 80% on-chain market share at its peak in 2021. As the DEX becomes immensely popular, so does the vampire attack on the DEX platform, where the entrant attacker clones the incumbent’s business model and drains liquidity from the incumbent to its cloned platform by providing tokenized rewards to the incumbent’s liquidity providers. We implement a quasi-experimental design to examine the impact of the vampire attack launched by Sushiswap (the attacker) against Uniswap (the incumbent DEX). We examine both the deposit-side and exchange-side impact of the vampire attack on the operational performance of the liquidity pools on Uniswap. Surprisingly, there is no significant effect of the vampire attack on the liquidity on the deposit side. Even more surprisingly, the vampire attack significantly increases the incumbent’s trading volume on the exchange side. Our study uncovers the underlying reasons that contribute to these intriguing results