The Decentralized Finance (DeFi) ecosystem has made significant progress since the yield farming frenzy that drove the bull run of 2020/2021.
During that time, most protocols were exclusively launching on the Ethereum blockchain. However, due to skyrocketing transaction fees, alternative Layer 1 blockchains like Solana and Layer 2 networks such as Optimism gained popularity as DApp-building ecosystems.
While this expansion made DeFi more accessible and affordable, it also presented its own set of challenges. DeFi applications were limited to a single blockchain network, making it difficult for users to transfer assets between chains or take advantage of opportunities across different networks.
To address this interoperability gap, developers and innovators in the DeFi market began constructing cross-chain infrastructures that leverage smart contracts to enable the transfer of digital assets between chains.
However, the question remains: are these bridges reliable in the long term, or is there a greater need for not just crypto bridges, but strong and seamless multichain compatibility?
Cross-chain Bridges: A Vulnerable Point in DeFi Security
According to crypto security firm Chainalysis, cross-chain bridge hacks accounted for nearly 70% of the total funds stolen in the DeFi sector in 2022.
It is essential to acknowledge the role that bridges have played in supporting the movement of digital assets across different networks before delving into the details of why cross-chain bridges are more susceptible to hacks. As of now, the total volume moved through DeFi bridges in the past month is $8.3 billion, as reported by DeFi Llama.
That being said, cross-chain bridges have also experienced significant losses. Hackers are attracted to bridges for several reasons, one of them being smart contract vulnerabilities. For example, the Nomad bridge suffered a $200 million exploit in 2022 due to a vulnerability in its code that allowed malicious actors to spoof transactions and withdraw funds that did not belong to them.
Another reason why bridges are a weak point in DeFi is the underlying infrastructure. Most DeFi bridges rely on a ‘storage’ smart contract to hold the digital assets intended for bridging. They then mint a similar amount of tokens to be used on the destination chain. This creates an opportunity for hackers to target the storage smart contract, as seen in the multichain hack where over $100 million was drained from the Fantom bridge.
The mentioned examples of bridge exploit approaches are just the beginning. Hackers, including the infamous Lazarus Group from North Korea, are constantly evolving and changing tactics. The group is suspected to have orchestrated notable bridge hacks like the Ronin and Harmony bridge hacks, where they stole close to $625 million and $100 million, respectively.
Multi-Chain Interoperability: The Solution for DeFi Composability
Clearly, given the incidents of the past few years, there is a need for DeFi to move away from bridges. But what alternatives can improve DeFi composability while maintaining a high level of security?
There are various ways to tackle this issue. In this case, DeFi innovators and developers have the option to build multi-chain DApps that can operate across multiple blockchain ecosystems. Many protocols that launched during the first DeFi wave, including Compound and Uniswap, have embraced multi-chain support to expand their services beyond the Ethereum blockchain.
Layer 2 networks like Prom’s ZKEVM are even more transformative. ZKEVM is designed to support interoperability across EVM and non-EVM chains. This DApp-oriented Layer 2 chain introduces a seamless multi-chain compatible environment and secure, privacy-focused transactions powered by ZK rollup technology.
Although still a nascent innovation in the DeFi interoperability space, Prom achieved over 235,000 transactions within a week of launching its testnet and attracted 100,000 active wallets in just two weeks.
As multi-chain solutions gain traction, it is worth noting that Ethereum’s Co-founder, Vitalik Buterin, expressed optimism about multi-chain blockchains in 2022 but was pessimistic about cross-chain applications’ implementation. Vitalik cited security vulnerabilities as the main reason for his stance, as demonstrated by the exploits in 2022 and 2023.
“The fundamental security limits of bridges are actually a key reason why while I am optimistic about a multi-chain blockchain ecosystem, I am pessimistic about cross-chain applications,” read a post by Vitalik on Reddit.
Conclusion
Decentralized markets still have significant potential for growth, but for them to become everyday tools for average investors, barriers need to be overcome. This will involve experimentation across several phases, which is why cross-chain bridges were initially popular. However, the trend seems to be shifting towards a multi-chain blockchain ecosystem. It will be fascinating to witness the next era of DeFi advancements, with interoperability and privacy at the forefront of future innovations in Web3.