How the Bitcoin network can solve the pitfalls of DeFi token bridges

Decentralized finance (DeFi) noticed a document influx from centralized exchanges as crypto customers flocked to self-custody options following the FTX collapse. Over 100,000 Bitcoin (BTC) left crypto exchanges so buyers may keep away from third-party custody. True to the “not your keys, not your cash” mantra of Bitcoin, DeFi solves a big selection of issues related to centralized entities.

Nonetheless, a number of experiences point out DeFi shouldn’t be a fail-safe setting, as high-profile protocol exploits like Wormhole, Nomad and Ronin made headlines in 2022 for the mistaken causes.

Supply: Token Terminal

DeFi exploiters significantly goal cross-chain bridges. In actual fact, cross-chain bridge exploits account for greater than half of all DeFi exploits since September 2020, with roughly $2.5 billion misplaced to those assaults. A Chainalysis report exhibits that token bridge assaults accounted for over 69% of the overall quantity of crypto stolen in 2022, a transparent indication that bridge exploits are on the rise.

Why do cross-chain bridges fail?

Because the DeFi ecosystem contains a number of blockchains, transferring digital belongings from one community to a different requires specifically designed protocols that work throughout completely different blockchains. Generally known as cross-chain bridges or token bridges, these protocols lock customers’ deposited tokens from one chain right into a contract, then challenge the equal quantity of belongings to the identical consumer within the receiving community.

For instance, because the Bitcoin blockchain shouldn’t be straight appropriate with the Ethereum (ETH) blockchain, the DeFi ecosystem depends on workarounds like wrapped Bitcoin and token bridges to faucet into the liquidity accessible within the Bitcoin ecosystem.

Most bridge protocols use central storage to again belongings on the receiving blockchain, making a goal spot for hackers. The shortage of developer experience in comparison with the advanced nature of making a bridge that works throughout a number of networks causes safety vulnerabilities, making cross-chain bridges the biggest assault floor of the DeFi house.

How you can make DeFi extra strong

To make DeFi extra resilient to exploits, a brand new method removes this weak hyperlink between blockchains. Mintlayer is a layer-2 blockchain on the Bitcoin community that goals to attach its sidechain to the Bitcoin neighborhood with as little friction as attainable. Customers can construct any sort of current DeFi utility on Mintlayer with out compromising the core fundamentals of safety and decentralization that the Bitcoin neighborhood is constructed on.

Mintlayer goals to eradicate token bridges, the biggest assault floor of DeFi, which prices customers billions of {dollars} yearly. As an alternative of wrapped tokens, customers can change their BTC for tokens on the Mintlayer blockchain through atomic swaps. By not requiring any form of cross-chain bridges, wrapped tokens or pegging mechanism to make use of Bitcoin on its blockchain, Mintlayer eliminates the dangers related to bridges and third-party custody.

Talking concerning the launch of the Mintlayer blockchain, Mintlayer co-founder Enrico Rubboli stated that it took over 18 months of laborious work. He added:

“Mintlayer is residence for initiatives prepared to construct on prime of Bitcoin. We’re thrilled by the standard and quantity of responses relating to potential initiatives. Folks need the performance of DeFi, however don’t wish to compromise the safety and rules of Bitcoin.”

To allow customers entry to their BTC natively on the go, Mintlayer launched a cellular Bitcoin pockets, accessible on each Google Play and the App Retailer.

DeFi ecosystem specializing in Bitcoin

Other than technical growth, the group launched the Mintlayer Ecosystem Fund with the purpose of constructing a Bitcoin-centric DeFi ecosystem. Tasks can be part of incubator packages, accelerator packages and apply for grants, or apply for direct funding by means of the fund.

The collapse of main centralized organizations like Celsius, Terraform Labs and FTX triggered an exodus from centralized exchanges to decentralized finance and self-custody options in 2022.

If the DeFi ecosystem needs to maintain this new consumer base, it wants to resolve ongoing points related to the direct interplay between customers and blockchains, beginning with safety — its most important facet. Coming again full circle, the reply might lie in making the trail from Bitcoin to make use of in monetary functions as brief and straight as attainable, with Mintlayer.