- “You should be afraid of bridges. There is an enormous risk profile,” said the head of DAOs at Alliance
- DeFi bridges create tradeoffs between simplicity, decentralization, and cost
Bridge protocols, designed to allow for relatively seamless transfers between different blockchains, are struggling to attract users as cryptocurrency markets continue to largely range sideways.
According to crypto data firm DeFi Llama, the total value of Multichain, the largest cross-chain bridge of its kind, has shrunk to under $2 billion from $7 billion in March.
As competition for users intensifies, DeFi platforms are struggling to become the investors of choice for cross-chain protocols that distrust bridges — which wiped out more than $1 billion in 2022, mostly through avoidable hacks.
Cross-chain bridging has proliferated during the 2021 yield farming bonanza. Will Robinson, head of DAOs at digital asset-focused investment manager Alliance, said consumers should do their research before using bridges.
“You should be afraid of bridges,” Robinson told Blockworks. “There is a huge risk profile. They’re new, they break for unexpected reasons and you don’t know what you’re getting yourself into.”
Alternative bridging solutions
Osmosis recently partnered with decentralized network Axelar on a one-click bridge running on Ethereum. The security of the cross-chain protocol lies in its decentralization, according to Sergey Gorbunov, co-founder of Axelar.
“Other bridges have approved nodes participating in the system, but Axelar does not require trust for liveliness or security,” Gorbunov told Blockworks. “Even if people can’t operate their machines, Axelar is still working on smart contracts.”
Permissioned bridging was largely responsible for the $625 million Ronin Bridge exploit, in which multiple validators securing the Axie Infinity bridge were housed by the company. Since then, Axie has expanded and further decentralized its validators.
Axelar delegates most of the bridging work to the protocol, so all consumers see assets moving from one chain to another – regardless of backend swaps.
With bridges getting a lot of bad press in 2022, some DeFi (decentralized finance) platforms are hoping to phase out the technology entirely.
Decentralized exchange (DEX) Hashflow hosted a media blitz this year to promote its “bridgeless” cross-chain swap protocol. Rather than having smart contracts perform swaps, Hashflow moves assets by having dedicated market makers agree on prices.
“Mint-and-burn bridges can only generate representative assets backed by the underlying chain,” Hashflow CEO Varun Kumar said in an email. Hashflow uses a “request-for-quote” model, where market makers set prices and “off-chain components handle the gnarly bits where slippage and MEV would be introduced.”
Dominic Williams, founder of the Internet Computer protocol, believes that bridging protocols like Axelar and Hashflow are not decentralized enough.
“If you have a centralized entity that’s taking funds, sooner or later things are going to go wrong and you’re going to get hacked,” Williams told Blockworks. “Bridges require a trusted operator, so the same old problems arise.”
With tokens wrapped, “you’re basically asking the bridge to take care of your money,” Williams said.
Packaged assets are a common bridging practice, where a protocol holds an investor’s original assets while providing a promissory note that can be traded on different blockchains. Security breaches result in packaged assets losing their value. After the wormhole hack, a $320 million bailout was required to salvage Solana protocols that accepted packaged ether as collateral.
Williams said his Internet computer network will enable bridgeless asset movement through an innovation called chain-key cryptography — breaking validator keys into pieces 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 drained the project’s token of 95% of its value in just two weeks.
According to Internet Computer, its bridgeless protocol will soon be integrated into Bitcoin, although the company has not given a specific date.
Ethereum co-founder Vitalik Buterin warned that cross-chain bridges would struggle to protect assets earlier this year. Security will likely remain an inherent risk investors face when moving assets between chains, but DeFi is a fledgling industry, industry participants say.
In each of the big bridge hacks this year, “protocols broke down for far more stupid reasons” than Buterin imagined, Robinson said. As DeFi matures, fake job listings will become less viable means of exploiting consumers’ wallets.
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