Will CEX be the end of the cross-chain bridge?

Moving crypto assets around a blockchain network is difficult, but as the crypto asset and blockchain industry matures, the Web3 world will undoubtedly become multi-chain, with various blockchain networks optimized for specific needs and use cases . However, it also increases the risk that asset owners take when transferring assets between different networks. In the last year alone, over $1 billion has been exploited from various cryptocurrency bridges — and the other day, we witnessed another $200 million stolen from a cross-chain bridge called Nomad.

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The uniqueness of this incident is that it does not require deep technical knowledge, which leads to a mixed bag of participants in this incident. Almost anyone who understands the operating model of blockchain transactions can participate in the attack, just copy and paste the original The attacker’s valid transaction data is just fine.

At this point, almost every existing cross-chain bridge has been exploited in one way or another. Some survived, while others never truly returned to their former glory. I’m not a network expert, I’m just here to describe how the cross-chain bridge works, its importance, disadvantages, and give my thoughts on its future changes as crypto assets mature.

How does the cross-chain bridge work?

Literally, as the word itself means, a cross-chain bridge “connects” cryptocurrency assets between multiple blockchain networks . This trend arguably started in early 2020 as multiple L1 ecosystems grew and the competition for market share invited people to come to their space and try what they had to offer.

These cross-chain bridges are usually done by wrapping tokens in smart contracts and issuing them on another chain, while ensuring that the user’s wrapped tokens can always be redeemed one-to-one back to native assets. Let’s look at a specific one. example.

Wrapped Bitcoin (WBTC) is one of the most popular cross-chain bridge assets, and the nature of cross-chain bridges is centralized and custodial . Users deposit BTC from the Bitcoin blockchain and receive WBTC, an ERC-20 token, on the Ethereum blockchain. BitGo is the custodian of WBTC, we need to go through the KYC process of BitGo to redeem WBTC . Additionally, there is a set of partners who hold the multisig keys for all BTC deposited and minted. In this case, the user can verify the on-chain data to see if it is 1:1 supported.

Classification of cross-chain bridges

Generally speaking, cross-chain bridges can be divided into trusted cross-chain bridges and untrusted cross-chain bridges .

The former means that the cross-chain bridge needs to rely on a centralized entity to operate, as shown in the WBTC example above . Users need to trust the security of these centralized custodians to ensure that their bridge assets have sufficient liquidity for users who want to redeem their native tokens. In this case, the risk is rogue behavior and incompetent security management by centralized entities.

The latter means that cross-chain bridges rely on smart contracts. Users need to trust the security of the underlying blockchain and the smart contracts written on it to realize the function of a cross-chain bridge . In this case, the risk is poorly written code, hackers, or new attack vectors that were previously overlooked.

Additionally, there is a trustless bridge that incorporates AMMs, essentially creating a more seamless cross-chain exchange experience . This mode is generally much more efficient than the traditional bridge mode. However, this is still a trustless model with the aforementioned inherent smart contract risks.

bursting of the bubble

For hackers, the cross-chain bridge of cryptocurrencies is like the flower of a bee . As the world becomes more multi-chain, and the total market capitalization of crypto assets (increase in DeFi TVL), attacks on these cross-chain bridges will gain more and more benefits. As of August 2, 2022, over $20 billion is locked in multiple bridges.

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Would you believe that a 20-30 year old founder and a team of less than 10 people can defend against state-level hackers? (Axie-Ronin, Harmony)

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school of thought

Vitalik once believed that the future will be multi-chain, but not cross-chain . He basically believes that a decentralized application that lives on different chains will generate complex interdependencies between multiple chains. According to this, a 51% attack on just one chain will have a significant contagion effect, threatening to the economy of the entire ecosystem.

Not only security risks, token economics also need to decide how to treat their tokens on different chains . There will be demand-supply issues to ensure that the original token economics framework ensures that the inflation rate of the token is not materially affected across chains.

The savior of the cross-chain bridge

Ironically, the word bailout is probably one of the most negative portrayals in the mainstream media about Wall Street firms that screw up and need some kind of government (or Warren Buffett) bailout . But now, cryptocurrencies are repeating TradFi’s mistakes at lightning speed:

  • Wormhole $320M Hacked – Jump Trading Helps
  • Ronin (Axie) $624M hacked – Binance, Animoca, a16z, Accel, Paradigm, Dialectic involved in aid.
  • Harmony Bridge $100M Hack – Raises the price of ONE tokens to compensate victims (the community actually helped form the project).
  • Poly Network suffers $611 million hack – thankfully the hackers returned the funds.

Of the four cases above, the Poly Network turned out the best, as the hackers ended up returning nearly all of the stolen funds . However, if we are attacked and either need capital bailouts or rely on the goodwill of hackers, what are we doing here?

Wouldn’t it be better for us to “bridge” assets through a CEX or a trusted cross-chain bridge?

These entities would be more regulated, have auditable reserves, have sued founders, and (hopefully) better service.

Of course, you could argue that CEXs and trusted cross-chain bridges can block you from accessing their services at any time, especially when they are under pressure from a lot of regulators. While this is 100% true, trustless cross-chain bridges could also be forced to do similar things, albeit on a much smaller scale, such as blocking IP addresses or flagging transactions from blacklisted wallets. At the end of the day , when the cryptocurrency scale reaches 1 billion users, 99% of consumers of these dApps don’t really care what the cross-chain bridge is, they just want the fastest, safest, most trustworthy way to transfer their assets .

I think the game is basically over when USDC/USDT finds a way to do cross-chain swaps and integrate fiat exports in G-20 countries.

some thoughts

Our goal is to build a decentralized financial ecosystem, but when a breach occurs, we will most likely need to rely on the government to get our funds back . If that’s the case, then why don’t we believe in endorsed CEXs? Yes, they may be slower with the new chain, but if the end result is the same, and with CEX being regulated, it’s likely to be more secure, doesn’t that defeat the original purpose?

I predict that “real” institutions with trillions of dollars will favor CEXs and trusted cross-chain bridges over trustless ones. So, while the trustless cross-chain bridge market will still exist, activity will be largely driven by speculators who want to find their Meme coins on the latest public alt-chains.

What’s happening now, combined with Vitalik’s views on a multi-chain future, may signal that we need to rethink the design, philosophy, and use cases of these cross-chain bridges.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/will-cex-be-the-end-of-the-cross-chain-bridge/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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