The Decentralized Finance (DeFi) ecosystem has come a long way since the yield farming craze that fueled the 2020/2021 bull run.
At the time, most of the protocols were launching solely on the Ethereum blockchain; however, with transaction fees skyrocketing, alternative Layer 1 blockchains such as Solana and Layer 2 networks like Optimism also gained popularity as DApp-building ecosystems.
While this was a step forward in making DeFi more accessible and cheaper, the advancement came with its own set of challenges. DeFi applications were limited to a single blockchain network, making it hard for users to transfer assets from one chain to another or capitalize on opportunities across the board.
To bridge this interoperability gap, developers and innovators in the DeFi market started building cross-chain infrastructures, which essentially leverage smart contracts to enable the transfer of digital assets between various chains.
The big question, however, is whether these bridges are reliable in the long term or if there is a stronger need for not just crypto bridges, but strong and seamless multichain compatibility?
Cross-chain Bridges: A Weak Link in DeFi’s Security
According to crypto security firm Chainalysis, cross-chain bridge hacks accounted for close to 70% of the total funds stolen in the DeFi sector in 2022.
So, why exactly are cross-chain bridges more vulnerable to hacks? Before diving into the details, it would be unfair to only criticize this type of DeFi infrastructure without acknowledging the role bridges have played in supporting the movement of digital assets across different networks. As of writing, the total volume moved through DeFi bridges over the past month stands at $8.3 billion, according to DeFi Llama.
That said, cross-chain bridges have also suffered almost equally in losses. Of course, there are several reasons why hackers have grown fond of targeting bridges; one of them is smart contract vulnerabilities. For instance, Nomad bridge was exploited to a tune of $200 million in 2022 thanks to a vulnerability in its code which allowed malicious actors to spoof transactions (withdraw funds which did not belong to them).
Another reason why bridges are a weak link in DeFi is the underlying infrastructure. By design, 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 constantly target the storage smart contract as was the case in the multichain hack where over $100 million was drained from the Fantom bridge.
The above examples of typical bridge exploit approaches are just the tip of the iceberg. Hackers from notorious jurisdictions such as North Korea’s infamous Lazarus Group are ever-evolving and changing tact; some of the notable bridge hacks the group is suspected to have orchestrated include the Ronin and Harmony bridge hacks. In the former, the hackers made away with close to $625 million and $100 million in the latter.
Multi-Chain Interoperability: The Solution to DeFi Composability
Evidently, there is a need for DeFi to move away from bridges given the incidents over the past few years. But what alternatives could improve the state of DeFi composability while maintaining a high level of security?
There are many ways to skin a cat. In this particular scenario, DeFi innovators and developers have the option of building multi-chain DApps that can operate across several blockchain ecosystems. In fact, most of the protocols that launched during the first DeFi wave, including the likes of Compound and Uniswap, have all embraced multi-chain support to scale their services beyond the Ethereum blockchain.
What’s even more transformative are Layer 2 networks such as Prom’s ZKEVM, which is designed to support interoperability across EVM and non-EVM chains. This DApp-oriented Layer 2 chain introduces a seamless multi-chain compatible environment, alongside privacy-focused and secure transactions powered by the 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 100,000 active wallets in just two weeks.
With multi-chain solutions slowly being embraced, it is also interesting to note that Ethereum’s Co-founder, Vitalik Buterin, had voiced his opinion in 2022, emphasizing that he was optimistic on multi-chain blockchains but pessimistic about the implementation through cross-chain applications. According to Vitalik, the main reason for this take is security vulnerabilities, which as highlighted in the previous section played out 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 (there really are a few separate communities with different values and it’s better for them to live separately than all fight over influence on the same thing), I am pessimistic about cross-chain applications.” partly read the reddit post.
Conclusion
Decentralized markets still have a lot of room for expansion; however, for them to become an everyday utility for the average investor, the barriers need to be broken. This will, of course, involve several phases of experimentation, which is why cross-chain bridges were initially popular, and now the tide seems to be shifting towards a multi-chain blockchain ecosystem. It will be interesting to watch the next era of DeFi advancements, especially with interoperability and privacy at the forefront of future innovations in Web3.