Decentralized finance (DeFi) saw a record inflow from centralized exchanges as crypto users flocked to self-custody solutions following the collapse of FTX. Over 100,000 Bitcoin (BTC) left crypto exchanges to allow investors to avoid third-party custody. True to the Bitcoin mantra, “Not your keys, not your coins,” DeFi solves a variety of problems associated with centralized entities.
However, multiple reports indicate that DeFi is not a resilient environment, with high-profile protocol exploits like Wormhole, Nomad, and Ronin making headlines in 2022 for all the wrong reasons.
Source: Token Terminal
DeFi exploiters specifically target cross-chain bridges. In fact, cross-chain bridge exploits account for more than half of all DeFi exploits since September 2020, with approximately $2.5 billion lost to these attacks. A Chainalysis report shows that token bridge attacks accounted for over 69% of the total amount of stolen cryptos in 2022, a clear indication that bridge exploits are on the rise.
Why do cross-chain bridges fail?
As the DeFi ecosystem spans multiple blockchains, transferring digital assets from one network to another requires specially designed protocols that work across different blockchains. Known as cross-chain bridges or token bridges, these protocols lock users’ escrowed tokens from a chain into a contract and then issue the appropriate amount of assets to the same user on the receiving network.
For example, since the Bitcoin blockchain is not directly compatible with the Ethereum (ETH) blockchain, the DeFi ecosystem relies on workarounds like wrapped bitcoin and token bridges to tap the liquidity available in the bitcoin ecosystem.
Most bridge protocols use a central store to secure assets on the receiving blockchain, creating a vulnerable point for hackers. The lack of developer know-how compared to the complexity of building a bridge that works across multiple networks creates security vulnerabilities and makes cross-chain bridges the biggest attack surface in the DeFi space.
How to make DeFi more resilient
To make DeFi more resilient to exploits, a new approach eliminates this weak link between blockchains. Mintlayer is a Layer 2 blockchain on the Bitcoin network that aims to connect its sidechain to the Bitcoin community in the smoothest way possible. Users can build any type of existing DeFi application on Mintlayer without compromising the core fundamentals of security and decentralization that the Bitcoin community is built on.
Mintlayer aims to eliminate token bridges, DeFi’s biggest attack surface, costing users billions of dollars every year. Instead of wrapped tokens, users can exchange their BTC for tokens on the Mintlayer blockchain via Atomic Swaps. Because using Bitcoin on its blockchain does not require any cross-chain bridges, wrapped tokens, or pegging mechanism, Mintlayer eliminates the risks associated with bridges and third-party custody.
Speaking about the launch of the Mintlayer blockchain, Mintlayer co-founder Enrico Rubboli said it took over 18 months of hard work. He added:
“Mintlayer is home to projects ready to build on Bitcoin. We are thrilled with the quality and volume of feedback on potential projects. People want the functionality of DeFi but don’t want to compromise the security and principles of Bitcoin.”
To allow users to natively access their BTC on the go, Mintlayer has launched a mobile bitcoin wallet available on both Google Play and the App Store.
DeFi ecosystem with a focus on Bitcoin
In addition to technical development, the team launched the Mintlayer Ecosystem Fund with the goal of building a Bitcoin-centric DeFi ecosystem. Projects can participate in incubator programs and accelerator programs and apply for grants or apply for direct investment through the fund.
The collapse of large centralized organizations like Celsius, Terraform Labs, and FTX triggered an exodus from centralized exchanges to decentralized finance and self-custody solutions in 2022.
If the DeFi ecosystem is to retain this new user base, it must resolve ongoing issues related to the direct interaction between users and blockchains, starting with security — its most critical aspect. To come full circle again, the answer may lie in making Bitcoin’s path to use in financial applications as short and straight forward as possible with Mintlayer.
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