💡Problem Statement

The imperfections in cross-chain interoperability

In the world of DeFi, transferring value and messages between blockchains has proven to be a complex task. This has led to vulnerabilities and losses, with over $2.66 billion lost due to bridge hacks in the last year alone, revealing the pressing need for a more robust and secure solution. [Source: DefiLlama]

Today, the bridges rely on the following mechanisms to transfer value across chains.

Lock + Mint & Burn + Redeem mechanism

In this approach, assets are locked on the source chain, and a wrapped asset is minted on the destination chain. The biggest problem with this approach is that the user bears the risk throughout the entire duration of holding the asset instead of just transferring it across chains.

This is because the balance between the locked and minted assets is maintained either with the help of a custodian (for example, all of the WBTC is maintained by BitGo) or in a trustless manner with multiple contracts at each layer, each with its own risks.

While using a custodian for maintenance, the biggest risk is trusting a third party, and in the web3 space, we have seen that go wrong time and again. The custodian risk is inherently solved with a trustless solution where multiple contracts are deployed on various chains, but it also has many limitations.

1. Multiple attack vectors: Usually, multiple contracts are deployed to manage the funds. One on the source chain, one on the destination chain, and a message passing layer. Time and again, we have seen either the source chain's contract being drained, leading to the wrapped asset losing its peg, fraudulent message passing leading to the release of funds where it shouldn't, or draining the destination pool. These complexities invite security risks. The complexity further amplifies due to these vulnerabilities existing across multiple chains, from smart contracts to messaging layers, creating a web of possible attack surfaces.

2. High cost: Message passing is either centralized or involves multiple contract calls, making cross-chain transactions expensive and incurring high gas fees.

Conventional native asset bridges

Conventional solutions that deal with native assets also fall short in capital efficiency, as liquidity is fragmented across different pairs on various chains.

Even unified liquidity pools face challenges due to varying blockchain speeds in contrast to each other, leading to transaction delays.

Additionally, relying on oracles and relayers for cross-chain communication introduces yet another attack surface and leads to higher costs due to the constant need to sync states between blockchains. Reversions are also extremely expensive.

Lastly, because complex message passing incurs high costs and obstacles to sync states - it has not been possible for bridges to implement the very optimized complex logics that give the highest throughput by unifying liquidity, using the most efficient algorithms, reducing gas fees, and provide a good user experience

Summary

The overarching challenge is to make asset transfers between blockchains safer, faster, and more cost-effective.

That’s what we’re here to do at Eddy Finance.

If you want to deep dive into the problems with the current interoperability market, visit our blog