Now that we have covered Decentralized lending platforms and Blockchains we can slowly start exploring decentralized finance even further, this time with DeFi Brdiges.

What Are DeFi Bridges?

A DeFi bridge is a protocol that enables you to send a cryptocurrency from one blockchain to another. In this example, we can use Ethereum and Solana. If you wanted to dumb it down completely, a DeFi bridge would look something like this.

At first glance, it seems completely normal. USDT coins can move from Ethereum land to Solana land using a single bridge that can be used for traveling in both directions but in reality, the process is a lot different.

Since ETH tokens are built on the ERC-20 standard and Solana coins use the SLP token standard, you can't use the same USDT on both chains. If you wanted to do so, the best solution we can offer right now would be a bridge that isn't really a bridge, we just call it that for simplicity.

The Actual Bridging Process

The need for sending crypto to other chains is constantly growing and DeFi engineers are having a hard time making it secure. The current process that most bridges use looks like this:

• ETH user sends funds to the bridge contract

• The bridge contract locks those tokens on Ethereum and issues a new token on the other end

• ETH user can now use the new tokens to trade the same value equivalent on Solana

To make it even easier to understand, let's use a concrete example.

If you "send" 100 USDT from ETH to Solana what you are doing is anything but sending the tokens. Your 100 USDT tokens will be locked in a contract that is sitting on Ethereum and since you are using the same address on Solana, the contract will issue a version of "synthetic" Tether tokens on Solana and send it to your SOL address.

It's like walking into a bar that only accepts their version of Monopoly money. You give a hundred bucks to the guy at the door and he gives you $100 worth of Monopoly money that is fully redeemable at the exit. If you end up spending $50 of that money the person that ended up with it can redeem it for USD when they leave the bar. You still got your money's worth and they got paid for their service or product.

Bridging Is Riskier Than You Think

Even though we are all using the term DECENTRALIZED when explaining DeFi we are only referring to the fully automated protocols. The money, however, is almost always controlled by the project that built the bridge or the community governing that project. What this means is that DeFi bridges have a fatal flaw that turns them into a honeypot and a very significant single point of failiure.

As a recent example, take the Wormhole Solana bridge hack where attackers walked away with $300M worth of Ethereum. This ETH wasn't printed out of thin air, it was deposited by bridge users.

In our case, it would mean that we entered the bar, gave our doorman USD for Monopoly money and someone just robbed the doorman so we can't redeem our USD on the way out. The Wormhole situation got resolved by replacing the stolen ETH with fresh new tokens but what happens if attackers steal billions next time?

What many people overlooked in the Wormhole hack is the significance of one single bridge. The contract was holding over 100K Ethereum tokens. All of this ETH was traded freely on Solana for the current market value of ETH because everyone knew that WETH from SOL is easily redeemable for ETH on the way out. Well, if no one was willing to put up 100k ETH to cover for the breach, this would be a catastrophic event actually.

The ETH sitting in the contract was a guarantee that gave WETH on SOL value in the first place. If that ETH wasn't there anymore that would mean that 100k WETH tokens on Solana are worth exactly $0 because there is nothing backing their value.

Atomic Swaps Are The Future

Projects like ThorChain have foreseen these problems with the current bridge infrastructure and chose to work on something completely different - atomic swaps.

This is surely a subject for another time but in short, these swaps would allow cross-chain trading without the need to give anyone custody over your funds. Atomic swaps enable trading native assets without moving them from one chain to another. Right now you can use ThorChain to swap between LTC and BTC without the need to move them to a centralized exchange or bridge them anywhere.

To be fair, even this technology has its flaws and weaknesses so it won't see wide adoption until security is resolved completely.

Posted Using LeoFinance ^Beta