Blockchain Bridges Improve Digital Asset Ecosystem
The Intelligent Insurer #62: Bridges solving interoperability but pose digital asset security challenges
Bitcoin was once the sole cryptocurrency and for a long time represented over 90% of the market cap of all coins. Ethereum and other blockchain networks have since become popular, gaining traction with numerous innovative solutions.
Smart contracts, decentralized finance (DeFi), decentralized applications (dApps), and more have become the order of the day. With the cryptocurrency market valued at over $1.8 trillion, industry participants have realized that interoperability is a major key to the industry's long-term success and Blockchain bridges will play a major role in the future of the industry.
The latest Intelligent Insurer will comprehensively analyze what blockchain bridges are and the solutions they offer. We will also discover the new issues these solutions create while solving existing ones. But first, we are excited to share news from our development team.
Insured Finance software development update
We are pleased to announce that we’ll complete our audit process next week. Testing using Slither and MythX, both smart contract auditing tools, was successful. We’ll explore the deep mode of MythX next week to ensure we cover all bases. We’ve also built the backend functionality that underpins voting processes for claim assessors. Policy holders can now file claims and claims assessors can vote to accept or deny them.
Critically, we’ve ensured that policyholders can file claims only on policies they hold and cannot participate in the voting process when their claims are involved. The same rules apply to investors as well. As the next week approaches, we’re gearing up to refine the backend of the voting process and install voting escalation functionality.
When claims assessors cannot reach consensus, the claim is escalated to all INFI members, except the policyholder and investor. Upon completion, the policyholder receives compensation (if approved) and voters receive a share of the voting fee derived from the money paid by the losing side. We will also finalize the design of certain parts of smart contract failure coverage.
The biggest task we have on the table is developing a wallet for mainnet deployment. The development on that goes well. We remain steadfast in providing our community the benefits of next-gen digital asset insurance in a secure environment. Given our progress, we’re extremely optimistic and confident of achieving these goals.
Blockchain bridges solve interoperability
One of the key drivers of blockchain technology's popularity is its promise of decentralization. However, as the networks expanded, they became siloed and could not exchange information seamlessly. This situation impeded the advancement of innovative solutions since they only worked well within their native networks.
Realizing this problem, blockchain developers created several methods of increasing interoperability among blockchains. One of them is a bridge. A blockchain bridge is a channel that allows the transfer of assets and data from one blockchain to another. The bridges create synthetic derivatives that are tied to an underlying asset from a blockchain to port them over to a second blockchain.
While some bridges are two-way, allowing the transfer of assets and data to and from blockchains, others are one-way. Trusted and trustless bridges are common features when speaking of bridges. Trusted bridges refer to centralized entities that maintain custody of assets while trustless bridges are decentralized protocols that place assets in user hands.
Prominent blockchain bridges
Wormhole is a cross-chain bridge built on the Solana network. It facilitates the transfer of assets and data across multiple blockchains. The protocol connects to multiple chains including Ethereum, Solana, Terra, BNB Chain, Polygon, Avalanche, Oasis, and Fantom. Users can conveniently move their crypto assets, including coins and NFTs, across these supported blockchains via Wormhole's bridge, Portal.
When investors wish to send a digital asset to any of the supported blockchains, the original asset is locked in the protocol's smart contract. In return, investors receive a Solana-based wrapped version of the token, which is pegged 1:1 to the original and can be swapped once they reach the target blockchain.
For instance, if a user wants to move ETH from Ethereum to Solana, the ETH is locked up and they receive a Solana-based Wrapped ETH (WETH). Each WETH is equal to ETH and can be swapped seamlessly.
Utilizing this bridge allows users to enjoy the low cost and high speed offered by the Solana network. This is especially true for users bridging assets from the Ethereum blockchain, which is notorious for its extremely high gas fees and slow transaction. Wormhole has grown very popular among industry participants. The total value locked (TVL) in the protocol is currently $3.39 billion.
(Source: DeFi Llama)
Synapse is another protocol that offers frictionless interoperability between blockchains. It refers to itself as the "cross-chain layer ∞ protocol". The protocol is designed to provide permissionless transactions between layer-1 and layer-2 blockchains, and sidechain ecosystems via its automated market maker (AMM). It also powers critical blockchain activities such as asset transfers, swaps, and other cross-chain functionalities.
Investors can use Synapse to swap assets across the most widely used EVM compatible blockchains. Perhaps one of the most interesting features of the Synapse protocol is that users can provide liquidity to the bridge. Synapse currently supports some of the deepest liquidity of the other interoperability solutions available, with connections to over 12 chains. Investors can earn a part of the fees users pay to the bridge to move their assets across multiple chains by providing liquidity to the protocol.
The protocol supports nUSD, a stablecoin that facilitates cross-chain swapping of assets. On each of the supported chains, the nUSD stablecoin is paired with the chain's native token. This pair is used to price and re-balance assets within Synapse's cross-chain liquidity pools to enable frictionless movement of assets between the blockchains with low slippage.
The protocol's native token SYN, serves as a governance token for the platform, giving holders the power to vote on decisions. It is also used to incentivize liquidity providers and pay for gas fees incurred by transactions. According to data from DeFi Llama, Synapse currently has a TVL of $748.1 million.
(Source: DeFi Llama)
Blockchain bridges create potential pathways for security failures
Blockchain bridges play a huge role in increasing interoperability. However, these bridges are not free from vulnerabilities. Like all aspects of the digital asset industry, investors' capital is at risk. Some decentralized bridges have remained untested and are more prone to network breaches and exploits. Sadly, even those that are tested are also susceptible to exploits. A case in point is the recent attack on Wormhole that saw the attackers minting about 120,000 WETH for free, causing the protocol to lose a whopping $320 million.
If investors decide to use trusted or centralized bridges, they face a different set of risks. While risks of external exploits such as hacks remain, investors are at risk of corrupt management and censorship. Since these bridges are centralized, they may be forced by government authorities to freeze users' assets or block transactions.
Therefore, investors must add an extra layer of protection for their assets to prevent losses resulting from unexpected incidents. One of the most effective fail-safe methods to protect assets is integrating insurance products into their portfolios. Insured Finance provides a suite of these products and investors can rest assured their assets are protected at all times.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.