Going cross-chain may be one of the most obvious conclusions for Web3. Being able to deposit collateral on Fantom, borrow against it on Avalanche, and use that to mint an NFT on Ethereum, after all, sounds like an exciting premise.
In fact, many protocols are developing with that in mind, allowing liquidity to flow, and facilitating interoperability. Today, these going from blockchain to blockchain mainly occurs via bridges.
However, there are challenges to this — which Vitalik Buterin, founder of Ethereum, pointed out. To understand why, we should take a look at recent history, as well as the vulnerabilities present in crypto.
The problem with bridges
For those new to the concept, bridging allows you to deposit an asset on one side and receive its wrapped version on another network. The ability to bridge is essential in enabling a cross-chain system, allowing users to move their funds easily.
For example, $ETH can be bridged from the Ethereum Network over to Harmony via MultiChain. Once done, you will receive $1ETH, a wrapped version of $ETH, backed by the native asset.
To facilitate the experience, there are usually incentivized pools for bridges, much like for Decentralized Exchanges. These provide liquidity in exchange for a cut of the bridged funds.
However, unlike a network, there is usually a limited number of validators providing security for these bridges. Furthermore, as more users provide liquidity, the reward for trying to exploit them increases exponentially.
Just this year, more than a billion dollars in funds were drained from two bridges. While this was already a news-worthy headline, their implications were far larger.
There was 80,000 $wETH on Solana left unbacked due to the wormhole hack. That translates to over 200 million in assets being technically worthless. If Jump Crypto had not made users whole, there may have been severe consequences for the crypto space.
The Ronin bridge, which supports the popular P2E game Axie Infinity, was also hacked for 600 million in assets. To make matters worse, the exploit was only noticed 6 days after it happened, showcasing the lax security.
Is a cross-chain future necessary?
Every network has a comparative advantage.
Degenbox is a strategy that takes advantage of this, marrying Ethereum and Terra together to increase stablecoin yields.
But why can’t we just build Abracadabra on Terra? Or Anchor on Ethereum?
I see three main reasons for this:
- Liquidity is spread thin
- Overwhelming network capacity
The reason Anchor works is because the Terra Foundation supplies a stable yield to attract deposits, accruing value to $LUNA.
Abracadabra was probably not built on Terra because their developers either did not see a good enough incentive, or a lack of interest-bearing collateral on the network.
While protocols could be cloned indefinitely, there are also drawbacks that come with them.
Much like how economies accelerate growth with open trade, having avenues for funds and ideas to go cross-chain can only be beneficial for the crypto space.
Tackling the problem
A first inclination would be to use Centralized Exchanges instead, securing the process. However, this is already how many bridges operate, facilitated by a centralized entity for fast and low-cost transactions.
Furthermore, not relying on the underlying network takes away from the decentralized spirit of Web3.
Another conclusion would be to encourage more white-hat hacking and rigorous auditing. With respect to this, the Wormhole bridge was backed by Jump Crypto, a multi-billion dollar firm, capable of hiring the best engineers.
The transparency of blockchain technology is a double-edged sword. Though its open-source nature gives way for crafty exploits, it also allows everyone to run their own checks.
I’m stealing from Vitalik again here, but participating in validating the blockchain is the only way I see forward. Currently, web3 comprises largely of users, but with a significant increase in builders and contributors, the space will only grow in security.
The silver lining is that with every hack, we learn of one more way to defend our smart contracts.
My optimism comes from a belief that the crypto space has yet to mature.
While not exactly cross-chain, Avalanche’s subnets, Polkadot’s Parachains, as well as Cosmos’ Inter-BlockChain Communication are all steps in the right direction.
Today, we see innovation in Web3 inconceivable just a decade ago — for better or for worse. If the technology keeps taking the right steps, we may eventually find a foolproof method of securing bridges and enabling a cross-chain world.
Featured Image Credit: CoinGeek
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