- “You should be afraid of bridges. There is a huge risk profile,” said the head of DAOs at Alliance.
- DeFi bridges create trade-offs between simplicity, decentralization and cost
Bridge protocols, designed to offer relatively seamless transfers between different blockchains, are struggling to attract users as cryptocurrency markets continue to spin largely sideways.
Multichain, the largest cross-chain bridge of its kind, saw its total value locked (TVL) fall from $7 billion to less than $2 billion in March, according to crypto data firm DeFi Llama.
As competition for users heats up, DeFi platforms are striving to become the favorite cross-chain protocol investors wary of bridges — which wiped out over $1 billion in 2022, largely partly via preventable hacks.
Cross-chain bridges have proliferated during the yield farming windfall of 2021. Will Robinson, head of DAOs at digital asset-focused investment manager Alliance, said consumers should do their research before investing. use bridges.
“You should be afraid of bridges,” Robinson told Blockworks. “There is a huge risk profile. They’re still new, they break for unexpected reasons, and you don’t know what you’re getting into.
Alternative Bridging Solutions
Osmosis recently partnered with decentralized network Axelar on a “one-click” bridge that runs on Ethereum. The security of the cross-chain protocol lies in its decentralization, according to Sergey Gorbunov, co-founder of Axelar.
“Other bridges have authorized nodes that participate in the system, but Axelar doesn’t require any trust for liveness or security,” Gorbunov told Blockworks. “Even if people can’t operate their machines, Axelar is still working on smart contracts.”
Authorized bridging was largely to blame for the $625 million Ronin Bridge exploit, where several validators securing the Axie Infinity Bridge were hosted by the company. Axie has since grown and further decentralized its validators.
Axelar delegates most of the transition work to the protocol, so all consumers see that assets are being moved from one chain to another, regardless of the exchanges in the background.
With bridges getting a lot of bad press in 2022, some DeFi (decentralized finance) platforms are hoping to phase out the technology altogether.
Decentralized exchange (DEX) Hashflow made a media blitz this year by announcing its “bridgeless” cross-chain exchange protocol. Rather than having smart contracts perform trades, Hashflow moves assets by having dedicated market makers agree on prices.
“Mint and Combustion bridges can only generate representation assets blocked by the underlying chain,” Varun Kumar, CEO of Hashflow, said in an email. Hashflow uses a “request for quote” model where market makers set prices and “off-chain components manage the gnarly parts where slippage and MEV would be introduced.”
Dominic Williams, founder of Internet Computer Protocol, believes that bridging protocols like Axelar and Hashflow are not decentralized enough.
“If you have a centralized entity taking funds, sooner or later things are going to go wrong and you’ll get hacked,” Williams told Blockworks. “Bridges require a trusted operator, so you run into the same old problems.”
With packed chips, “you’re basically asking the deck to take care of your money,” Williams said.
Wrapped assets are a common bridging practice in which a protocol retains an investor’s original assets while providing an IOU to be traded across different blockchains. Security breaches lead to loss of value of wrapped assets. After the Wormhole hack, a $320 million bailout was needed to save Solana Protocols which accepted wrapped ether as collateral.
Williams said his Internet computing network will enable the movement of assets without bridges through an innovation called chain-key cryptography — the splitting of validator keys into chunks to make a blockchain publicly available.
Internet Computer received over $100 million in funding from venture capital firms a16z and Polychain Capital in 2018 – before a market downturn robbed the project token of 95% of its value in just two weeks.
Internet Computer says its bridgeless protocol will soon integrate with Bitcoin, although the company did not provide a specific date.
Vitalik Buterin, co-founder of Ethereum, warned cross-chain bridges would struggle to keep assets safe early this year. Security will likely remain an inherent risk investors take when moving assets between chains, but DeFi is a young industry, according to industry participants.
In each of the major bridge hacks this year, “protocols were broken for far dumber reasons” than Buterin had imagined, Robinson said. As DeFi matures, fake job offers will be less viable ways to mine consumer wallets.
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