The decentralized finance (DeFi) landscape has undergone seismic shifts since its emergence, but few events were as dramatic—or as instructive—as the so-called “vampire attack” of 2020. At the heart of this pivotal moment was Uniswap, the leading decentralized exchange (DEX), and its response to SushiSwap’s aggressive bid to siphon off liquidity. This clash not only reshaped market dynamics but also gave birth to the UNI governance token—a turning point that continues to influence how protocols design incentives and governance today.
Recent developments, such as Uniswap governance lead Erin Koen’s proposal to distribute protocol fees to staked and delegated UNI holders, have reignited interest in this history. The idea is simple: align long-term value accrual with active governance participation. Market response was immediate—UNI’s price surged over 60% in a single day—demonstrating enduring confidence in its dual role as both a governance instrument and value-bearing asset.
But to fully appreciate the significance of today’s proposals, we must revisit the chaos and innovation of DeFi Summer 2020. This article unpacks that era through data-driven insights from a 2022 academic study by researchers at The Chinese University of Hong Kong, analyzing how governance tokens like UNI and SUSHI emerged not just as tools for decentralization, but as strategic weapons in an economic war for liquidity.
What Is Liquidity Mining?
Liquidity mining is a mechanism designed to incentivize users to provide assets to decentralized exchanges (DEXs) by rewarding them with tokens. First conceptualized by IDEX in 2017 and popularized by projects like Synthetix and Chainlink, it exploded into mainstream adoption during mid-2020.
At its core, liquidity mining mirrors traditional banking: users deposit token pairs into automated market maker (AMM) pools, enabling peer-to-peer trading without order books. In return, they earn a share of transaction fees—essentially interest on their deposited capital. But what truly fueled DeFi’s rapid growth was the addition of governance tokens as extra rewards.
Governance tokens grant holders voting rights on protocol upgrades and parameter changes. More importantly, they carry economic value tradable on both centralized (CEX) and decentralized exchanges (DEX). Protocols distribute these tokens to bootstrap user engagement and liquidity, creating a flywheel effect: more rewards → more liquidity → better trading experience → more users.
By September 2020, total value locked (TVL) across DeFi had grown tenfold from June levels—to over $10 billion—echoing the frenzy of the 2017 ICO boom.
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The Vampire Attack: SushiSwap vs. Uniswap
In August 2020, SushiSwap launched as a direct fork of Uniswap’s open-source code—with one critical twist: it introduced the SUSHI governance token and immediately began distributing it to Uniswap’s liquidity providers (LPs).
This move became known as a “vampire attack”—a strategy where a new protocol drains liquidity from an established one by offering superior short-term incentives. Here's how it worked:
- SushiSwap allowed Uniswap LPs to stake their UNI-V2 LP tokens.
- In return, they earned newly minted SUSHI tokens every block.
- Once enough liquidity migrated, SushiSwap planned to migrate the underlying assets from Uniswap to its own platform.
The results were staggering. Within days:
- Uniswap’s TVL plummeted from ~$3 billion to under $1 billion.
- Over 50% of new LPs on Uniswap during this period were likely farming SUSHI.
- Many medium- and high-value LPs actively participated in the migration.
However, Uniswap didn’t stay down for long.
On September 16, 2020, Uniswap launched its own governance token—UNI—with a bold distribution strategy:
- 400 UNI retroactively airdropped to anyone who had interacted with the protocol before September 1.
- Additional UNI rewards offered for providing liquidity across four key pools over a two-month period.
The反击 (counterattack) was swift. Uniswap regained dominance in TVL within days. By November 14, its TVL peaked at $30.6 billion—only to drop sharply when the mining rewards ended on November 18.
This back-and-forth revealed a crucial insight: governance tokens are powerful short-term magnets for liquidity—but poor long-term retainers.
Data-Driven Insights: Behavior of Liquidity Providers
To understand the real impact of governance tokens, researchers analyzed over 300,000 addresses interacting with Uniswap and SushiSwap between May 2020 and July 2021. Using unsupervised clustering based on transaction patterns, they categorized LPs into six behavioral types:
1. Inconsequential LPs
- Uniswap: 58.1%, SushiSwap: 17.2%
- Provide minimal liquidity (<$1,000), infrequent activity.
- Likely experimenting rather than investing seriously.
2. Lightweight LPs
- Subdivided into active and inactive subgroups.
- Make up most of the LP base when combined with inconsequential types.
- More prevalent on SushiSwap (42.2%), suggesting smaller investors respond strongly to ongoing token incentives.
3. Medium-Sized LPs
- Represent serious participants chasing yield.
Further split into:
- Risk-Averse: cautious, less frequent trades.
- Risk-Seeking: actively farm multiple protocols for maximum APY.
- Highly sensitive to reward changes—many exited during shifts in SUSHI or UNI emissions.
4. Heavyweight LPs
- Largest contributors in terms of capital (e.g., one address provided nearly $30M worth of assets).
- Least active in terms of transaction frequency.
- Focused on long-term fee income rather than speculative gains.
- Least influenced by external token incentives.
Crucially, the most active LPs weren’t the wealthiest—they were mid-tier actors aggressively optimizing yields across platforms. These users drove much of the volatility seen during the vampire attack and subsequent countermeasures.
Long-Term Effects: Stability Through Persistent Incentives
While UNI’s liquidity mining campaign ended after two months, SushiSwap maintained continuous SUSHI emissions. This difference had lasting consequences.
Analysis of overlapping LPs showed:
- In late 2020, 87.2% of SushiSwap’s heavyweight LPs also provided liquidity on Uniswap.
- By mid-2021, that overlap dropped by 41.4% among top-tier LPs.
This decline indicates that sustained token incentives helped SushiSwap cultivate a dedicated, independent user base—proving that long-term reward structures can foster loyalty even without initial brand advantage.
Meanwhile, Uniswap’s post-mining TVL stabilized only after broader market growth (notably rising ETH prices) re-incentivized participation—highlighting reliance on macroeconomic factors once direct rewards ended.
Key Takeaways for Modern DeFi Protocols
The battle between Uniswap and SushiSwap offers enduring lessons:
- Governance tokens work best as retention tools—not just acquisition engines. Short-term mining programs attract yield chasers who leave once rewards dry up.
- True decentralization requires more than passive ownership. Most UNI and SUSHI holders don’t participate in governance; instead, they treat tokens as financial instruments.
- User behavior is highly segmented. Protocols must design incentive layers for different LP profiles—not assume one-size-fits-all.
- Persistent innovation matters. SushiSwap survived not just because of SUSHI rewards, but through continuous product development (e.g., lending, staking).
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Frequently Asked Questions (FAQ)
Q: What is a vampire attack in DeFi?
A: A vampire attack occurs when a new protocol forks an existing one and uses token incentives to lure away its liquidity providers. The goal is to quickly gain market share by exploiting another project’s user base and infrastructure.
Q: Why did Uniswap launch UNI?
A: Uniswap introduced UNI primarily to defend against SushiSwap’s vampire attack. By offering retroactive airdrops and temporary liquidity mining rewards, it incentivized users to stay or return—successfully reclaiming TVL leadership.
Q: Do governance tokens actually lead to decentralized control?
A: Not always. While designed for community governance, many tokens end up concentrated among large holders or traded purely for profit. True decentralization requires active participation mechanisms beyond token ownership.
Q: How do liquidity providers earn money on DEXs?
A: LPs earn income through transaction fees generated by traders using their pools. They may also receive additional rewards in the form of governance tokens during liquidity mining campaigns.
Q: What causes impermanent loss?
A: Impermanent loss happens when the price ratio of deposited tokens changes significantly after being added to a pool. If one token appreciates much faster than the other, LPs end up with less value than if they’d simply held the assets outside the pool.
Q: Can small investors profit from liquidity mining?
A: Yes, but with caveats. Small-scale LPs face higher relative gas costs and greater exposure to impermanent loss. Success often depends on choosing stable pairs and timing entry/exit around reward cycles.
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Toward Smarter Incentive Design
As DeFi matures, protocols must evolve beyond simple token drops. Future success lies in combining economic sustainability, governance engagement, and user-centric design.
Potential improvements include:
- Rewarding constructive contributions (e.g., submitting governance proposals).
- Introducing tiered voting power based on stake duration.
- Integrating reputation systems to reduce plutocracy risks.
- Offering non-token benefits like reduced fees or early access.
Ultimately, the story of UNI and SUSHI isn’t just about competition—it’s about adaptation. Governance tokens began as survival tools during DeFi Summer but are now evolving into foundational elements of digital economies.
Understanding their origins helps us build better ones for the future.
Core Keywords: DeFi, liquidity mining, governance token, UNI, SUSHI, vampire attack, total value locked (TVL), liquidity provider