DeFi Ecosystem Evolves: Cross-Chain Bridges vs. Multi-Chain Interoperability
The Decentralized Finance (DeFi) ecosystem has undergone significant development since the yield farming craze that drove the bull run of 2020/2021.
During that time, most protocols were exclusively launching on the Ethereum blockchain. However, as transaction fees skyrocketed, alternative Layer 1 blockchains like Solana and Layer 2 networks such as Optimism gained popularity as ecosystems for building decentralized applications (DApps).
While this expansion made DeFi more accessible and cost-effective, it also presented challenges. DeFi applications were limited to a single blockchain network, making it difficult for users to transfer assets or take advantage of opportunities across different chains.
To address this interoperability gap, developers and innovators in the DeFi market started building cross-chain infrastructures that utilize smart contracts to facilitate the transfer of digital assets between various chains.
However, the question remains: are these bridges reliable in the long term, or is there a need for stronger multichain compatibility, not just crypto bridges?
Cross-chain bridges have proven to be a weak link 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 would be unfair to solely criticize these bridges without acknowledging their role in supporting the movement of digital assets across different networks. In fact, DeFi bridges have facilitated a total volume of $8.3 billion in the last month alone, according to DeFi Llama.
However, cross-chain bridges have also suffered significant losses. Hackers have targeted bridges due to smart contract vulnerabilities. For example, the Nomad bridge was exploited for $200 million in 2022 due to a vulnerability in its code that allowed malicious actors to spoof transactions.
Another reason why bridges are a weak link in DeFi is the underlying infrastructure. Most DeFi bridges rely on a “storage” smart contract to hold digital assets intended for bridging, creating 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.
These examples are just the tip of the iceberg, as hackers are continuously evolving their tactics. Notorious groups like North Korea’s Lazarus Group have orchestrated notable bridge hacks, including the Ronin and Harmony bridge hacks, resulting in millions of dollars stolen.
To improve DeFi composability while maintaining a high level of security, developers have the option of building multi-chain DApps that can operate across several blockchain ecosystems. Protocols like Compound and Uniswap have embraced multi-chain support to scale their services beyond Ethereum.
Layer 2 networks like Prom’s ZKEVM also play a transformative role by enabling interoperability across EVM and non-EVM chains. Prom’s DApp-oriented Layer 2 chain offers a seamless multi-chain compatible environment, along with privacy-focused and secure transactions powered by ZK rollup technology.
Although multi-chain solutions are still in their early stages, they are gaining traction. Ethereum Co-founder Vitalik Buterin expressed optimism about multi-chain blockchains but pessimism about cross-chain applications due to security vulnerabilities.
In conclusion, decentralized markets have room for expansion, but barriers need to be broken to make them everyday utilities for average investors. Cross-chain bridges were initially popular, but the tide is now shifting towards a multi-chain blockchain ecosystem. The future of DeFi advancements will be driven by interoperability and privacy in Web3.
