The Lingering Problem With Cross-Chain Bridges

In 2022 alone, almost a billion dollars was stolen from cross-chain bridges. These bridges were hit with shocking consistency, and it was like they were in some hacker's Blackbook. In fact, at some point, a cross-chain bridge heist was the second biggest heist in the history of crypto.

If one were cynical, one would assume that cross-chain bridges are gifts to hackers and criminal-minded users on the blockchain. But that's hardly true. Interoperability is a vital part of the Web 3.0 infrastructure.

Without interoperability protocols, decentralization would be a myth. People wouldn't be able to move their assets from one chain to the other without the use of centralized exchanges. And this would be contrary to the guiding principle of Web 3.0, which is decentralization.

Despite solving one of the most important problems of crypto today, these cross-chain bridges, in their present format, leave a lot to be desired.

The Problem With Cross-Chain Swaps

In the early days of the blockchain, cross-chain swaps were nonexistent. That's because there was only one chain, and that was the master chain; the Bitcoin blockchain.

However, with the arrival of Ethereum, things began to change. People saw Bitcoin as a guiding principle, not the goal of crypto. This led to even more innovation and even more blockchains.

But blockchains are closed ecosystems by design, and having multiple blockchains means inter-blockchain transactions will not be smooth. Interoperability networks however solve this problem with an interesting instrument.

The Theory Of Wrapped Tokens

Let's imagine you have 10 X tokens on X blockchain. Now imagine you want to use those X tokens to purchase Y tokens on the Y blockchain. There are two ways you could presently achieve that goal.

The first is to take your X tokens to a centralized exchange like Binance, Kraken, or KuCoin and exchange it for Y tokens.

Your second option is to take X tokens to a cross-chain bridge, deposit it in a smart contract, and get wrapped nX tokens that can be spent on the Y blockchain or exchanged on the blockchain. There are many variations of this process of course (such as the burn and print, lock and unlock, and lock and print) but the main gist of it is that most times you deposit your real coins and make use of a derivative on the chain you're transferring to.

Cog In The Wheel

All things considered, these aren't bad options. Most times, if you know what you're doing, you'll be successful with your transactions.

However, cryptocurrencies were created with the assumption that if people can be malicious, they will. In this instance, it's very obvious that people can be malicious with the first option. Centralized exchanges are every bit as bad as banks (and they can even be worse, seeing as a number don't even have boards).

Like FTX and Mt. Gox before it, these exchanges could become insolvent. And since they have no lender of last resort, all your deposits could be lost.

The second option also comes with its safety issues, but they aren't immediately obvious. By getting wrapped tokens, you are depositing your actual tokens in a locked smart contract of bridges. In most cases, these bridges are governed by smart contracts which means they aren't centralized— in principle.

But there are few cogs in that wheel. The first, and possibly the most obvious, is that bridges can be hacked. While they are certainly safer than custodial solutions, they bear risks.

Another cog, and perhaps the most important, is that these derivatives that are minted on chains aren't safe. Many people have exposed the inherent insecurity of wrapped tokens, including Vitalik, but the most important safety concern is the fact that the original tokens are usually kept in a bridge.

And if there's one thing 2022 has taught the crypto community, it's that token pools to hackers are like flowers to bees. Hackers will seek out large honey pots, and will not persist until it's hacked.

\When that (almost inevitably) happens, the users of wrapped tokens will be left holding a bag they should never have been holding.

In essence, cross-chain bridges aren't as safe as we thought they were, and the numerous hacks in 2022 have confirmed that.

What Is The Solution?

The idea of cross-chain protocols is too vital to be abandoned by the crypto community. While the present form of these protocols is anything but safe, the idea is an important one.

The only thing missing is the execution of these ideas. The obvious solution to the problem of wrapped tokens is creating a cross-chain protocol that operates with native assets without any intermediaries. By enabling the creation of a native permissionless market, wrapped tokens would be unnecessary and even when pools are hit there will be very limited exposure to users.

In any case, there are projects like Interswap already working on building exactly the sort of permissionless protocol that reduces the exposure people have to wrapped, intermediate, and synthetic tokens. Cross-chain native pools like this, if executed properly, would reduce the systemic risks posed by the contagion of a wrapped token pool implosion.

Of course, there's nothing that suggests that these projects would be a success. There are way too many unknowns in the world of crypto for anyone to assert that. However, what is known is that there's a problem with cross-chain DEXes and bridges, and it needs solving.