The decentralized finance (DeFi) landscape was forever transformed during the explosive summer of 2020. At the heart of this revolution was a dramatic event known as the "vampire attack" — a pivotal moment that not only reshaped competitive dynamics in the DeFi space but also led to the creation of Uniswap’s governance token, UNI. Today, as Uniswap revisits its fee distribution model with new governance proposals, understanding this historical context becomes essential for grasping the evolving role of governance tokens, liquidity mining, and user incentives in Web3 protocols.
This article dives deep into the origins of UNI, analyzes how SushiSwap’s aggressive strategy triggered a chain reaction across DeFi, and explores what this means for the future of decentralized exchange (DEX) sustainability, user behavior, and protocol governance.
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What Is Liquidity Mining?
Liquidity mining emerged as a groundbreaking incentive mechanism in DeFi, enabling users to earn rewards by supplying assets to decentralized exchanges. First introduced by IDEX in 2017 and later refined by projects like Synthetix and Chainlink, liquidity mining gained massive traction in mid-2020 when platforms such as Compound, SushiSwap, and eventually Uniswap began distributing governance tokens to liquidity providers (LPs).
At its core, liquidity mining functions similarly to earning interest on a bank deposit. Users deposit token pairs into automated market maker (AMM)-based DEXs through smart contracts. Every trade executed on the platform incurs a small fee, which is distributed proportionally to LPs. On top of these fees, protocols often reward users with governance tokens, granting them voting rights and speculative value.
These tokens serve dual purposes:
- Governance: Enable holders to vote on protocol upgrades and parameter changes.
- Incentive: Offer financial upside, tradable on both centralized (CEXs) and decentralized exchanges (DEXs).
By August 2020, the total value locked (TVL) in DeFi had surged from $1.05 billion in June to over $10 billion — a tenfold increase driven largely by token incentives. This boom mirrored the ICO frenzy of 2017 but with a crucial difference: participants weren’t just buying into promises — they were actively engaging with protocols.
Yet, despite its popularity, questions remain: Are governance token rewards truly effective? Do they foster long-term loyalty or merely attract short-term speculators?
The Rise of Uniswap and SushiSwap
To understand the birth of UNI, we must examine two key players: Uniswap and SushiSwap.
Uniswap V1 & V2: Building the Foundation
Launched in November 2018, Uniswap V1 introduced an innovative AMM model where every liquidity pool required ETH as one side of the pair. While revolutionary, it came with limitations — cross-token trades required two steps (e.g., DAI → ETH → USDC), increasing gas costs and slippage.
In May 2020, Uniswap V2 launched, solving this issue by enabling direct ERC-20/ERC-20 swaps. It also added features like flash swaps and improved price oracles. With rising Ethereum adoption and growing DeFi interest, Uniswap quickly became the dominant DEX.
However, its success attracted competition.
The Vampire Attack: SushiSwap Enters the Scene
On August 28, 2020, SushiSwap — a fork of Uniswap’s open-source code — launched with a bold strategy: steal Uniswap’s liquidity using governance incentives.
SushiSwap introduced its native token, SUSHI, and implemented a unique reward system:
- Users who staked their Uniswap LP tokens (UNI-V2) into SushiSwap’s MasterChef contract would earn SUSHI emissions.
- After sufficient liquidity migrated, SushiSwap planned to “migrate” the pooled assets from Uniswap to its own platform.
This tactic became known as a "vampire attack" — siphoning off users and capital from a competing protocol through superior short-term incentives.
The impact was immediate:
- Within days, Uniswap’s TVL dropped from ~$3 billion to under $500 million.
- Thousands of new addresses flocked to provide liquidity, hoping to maximize SUSHI rewards.
But why did so many users abandon Uniswap — the market leader?
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How Governance Tokens Influence User Behavior
To analyze the real impact of governance tokens, researchers studied over a year of transaction data from both platforms. Using unsupervised clustering techniques, they categorized liquidity providers into six distinct behavioral groups:
- Marginal Providers – Minimal liquidity contributors (<$1K), low activity.
- Light Active Providers – Moderate capital, higher engagement.
- Light Inactive Providers – Similar capital size but infrequent interaction.
- Risk-Averse Mid-Tier Providers – Cautious participants managing larger positions.
- Risk-Seeking Mid-Tier Providers – Actively chase high APYs across multiple platforms.
- Heavy Providers – Large-scale liquidity suppliers focused on sustainable fee income.
Key Insights:
- Over 59% of LPs provided only small amounts of liquidity.
- The most active users weren’t the biggest capital holders — they were mid-tier providers chasing yield.
- Heavy providers showed little sensitivity to external incentives; their decisions were driven by long-term fee potential.
This reveals a critical truth: governance tokens primarily attract yield farmers, not long-term stakeholders.
TVL Wars: The Battle for Liquidity
Let’s walk through the timeline of key events:
Phase 1: Vampire Attack (Aug 28 – Sep 17)
SushiSwap’s SUSHI rewards triggered a mass exodus from Uniswap. However, even at its lowest point (~$500M), Uniswap maintained high daily trading volumes (~$300M–$800M). This suggests many users stayed for reliable fee income despite lower incentives.
Phase 2: Uniswap Strikes Back (Sep 18 – Nov 18)
On September 16, 2020, Uniswap announced UNI, its governance token. A portion was retroactively airdropped to early users (400 UNI per eligible address, worth ~$1,200 at launch). More importantly, Uniswap launched four new liquidity pools with temporary UNI rewards for LPs.
The results were staggering:
- On September 18 alone, Uniswap gained $1.65 billion in TVL.
- SushiSwap lost $159 million on the same day.
- By mid-November, Uniswap’s TVL peaked at $3.06 billion, reclaiming dominance.
But when the UNI mining program ended on November 18, history repeated itself — $1.29 billion fled back to SushiSwap in a single day.
This cyclical pattern highlights a core challenge: short-term token incentives create temporary loyalty, not sustainable growth.
Long-Term Effects: Who Retains Users?
Despite losing liquidity after incentive programs ended, SushiSwap demonstrated something valuable: long-term token emissions can build dedicated communities.
Analysis showed that while many LPs rotated between platforms during reward campaigns:
- A growing segment of SushiSwap’s heavy providers consisted of exclusive users — those who didn’t participate in Uniswap at all.
- One year after launch, overlapping heavy providers dropped by 41.4%, indicating SushiSwap had cultivated its own loyal base.
In contrast, Uniswap’s reliance on temporary incentives meant most large providers remained opportunistic.
Core Keywords and Their Role in DeFi Evolution
Based on this analysis, here are the central themes shaping today’s DeFi ecosystem:
- Governance Tokens
- Liquidity Mining
- Total Value Locked (TVL)
- Decentralized Exchange (DEX)
- User Incentives
- Yield Farming
- Protocol Sustainability
- Behavioral Economics in Web3
These keywords reflect both technical mechanisms and human motivations driving decentralized networks.
Frequently Asked Questions
Q: Why did Uniswap create UNI?
A: Uniswap launched UNI primarily in response to SushiSwap’s vampire attack. The goal was to retain users by offering governance rights and short-term financial incentives through liquidity mining.
Q: Are governance tokens effective for long-term user retention?
A: Not inherently. While they attract users quickly, studies show most participants leave once rewards diminish. True retention comes from utility, trust, and ongoing innovation — not just token drops.
Q: What is a vampire attack in DeFi?
A: A vampire attack occurs when a competing protocol uses aggressive token incentives to lure liquidity and users away from an established platform — exactly what SushiSwap did to Uniswap in 2020.
Q: Can decentralized governance survive without token incentives?
A: Pure altruism rarely scales in Web3. However, future models may shift toward rewarding active contributors (e.g., developers, voters, educators) rather than passive liquidity provision alone.
Q: How do temporary rewards affect APY for LPs?
A: Short-term boosts inflate APY initially, but rapid inflows increase competition among LPs and dilute individual earnings. Once rewards end, APY often crashes unless organic trading volume supports it.
Q: What lessons can new protocols learn from this case?
A: Relying solely on token emissions is unsustainable. Protocols should focus on building genuine utility, reducing friction (like gas costs), and designing governance systems that reward meaningful participation.
The Future of Governance and Incentive Design
While liquidity mining successfully jumpstarted DeFi growth, it exposed fundamental flaws:
- Governance tokens are often treated as speculative assets rather than tools for community control.
- Passive liquidity provision doesn’t equate to active protocol stewardship.
- High gas fees and complex interfaces exclude smaller participants.
Moving forward, successful protocols will need to rethink distribution models:
- Reward contributors who improve documentation, propose upgrades, or enhance security.
- Introduce tiered governance rights based on reputation or sustained involvement.
- Explore hybrid models combining fee-sharing with voting power.
As seen with recent proposals to distribute protocol fees to staked UNI holders, there's a clear shift toward aligning economic benefits with governance participation — turning passive token holders into active stakeholders.
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Conclusion
The story of UNI’s creation is more than just a tale of competition — it’s a case study in how incentives shape behavior in open financial systems. The vampire attack forced Uniswap to evolve rapidly, proving that even market leaders aren’t immune to disruption.
But beyond survival tactics lies a deeper question: What should governance mean in Web3? Should it be reserved for those who supply capital — or those who contribute meaningfully to a protocol’s development?
As DeFi matures, the answer will likely involve balancing both. For now, one lesson stands clear: sustainable ecosystems aren't built on token drops alone — they’re built on trust, utility, and inclusive participation.
The summer of 2020 may have been fueled by hype and yield chasing — but its legacy is paving the way for a more resilient, equitable future in decentralized finance.