Oracle and crypto pioneer Vitalik Buterin raised concerns about cross-chain applications early this year and was proven correct just months later with the $650 million Ronin Bridge hack.
What this highlights is the temptation for DeFi projects to sacrifice security for convenience, where these choices generally favor the team and not the user. Human error is the biggest industry risk of all and there are too many cases of teams not implementing proper security management.
Whether it’s one person having sole access to funds, an absence of multi-sigs or holding private keys to user funds, there are significant risks which need to be addressed in the DeFi space.
Q2 2022 hedge fund letters, conferences and more
The Future Is Multi-Chain
What happened in the Ronin Bridge hack was multi-layered: it’s not only the bridge. The marketplace and wallets where people hold Axie NFTs were also compromised. Centralization opened up a little back door because the lending construct they built is centralized.
Here we can see the dangers of cross-chain bridging. Vitalik suggests the future is multi-chain because these bridges are major weak points in terms of security and potential exploits. We’ve seen it with Solana’s Wormhole as well as a couple more projects. These are simple, small exploits and malicious actors are growing more sophisticated all the time which is cause for considerable concern.
Another downfall of cross-chain solutions is that users will hold assets and mint it on the other side. You can steal on one side, mint double on the other. There are so many things that can go wrong and this is why projects may hesitate to make NFTs cross-chain compatible in the future. Wherever it’s minted, it should stay there.
Huge security risks blatantly exist and this is not helped by the greed of project leaders. Investing in better infrastructure and utilizing multi-chain solutions will stop users from constant exposure to major security exploits. It can only be hoped teams listen and adapt before many more hundreds of millions worth of cryptocurrency is lost.
Making On-Chain Lending Work
When we talk about Axie Infinity, with one of the most successful scholarship programs at least initially, pointing out the human-heavy layer is crucial. If a user lends an Axie, all the funds are going to be distributed to their wallet and they then have to send them over to the scholar. But a scholar has to login to access the Axies via an email password.
The rise of on-chain lending and better transparency promises an innovative response to the current state.
It’s only a matter of time before totally decentralized and permissionless solutions hit the mainstream, at least relative to the crypto space, and usurps the current scholar model which really isn’t working in a seamless, safe and user-friendly manner. So far most projects have given us markedly centralized systems which are arguably not true to the spirit of Web3.
Smart contracts can be created to automate the whole process and make it truly trustless for all participants. This poses an existential threat to the clunky lending programs currently on offer.
Interoperability Manifested
The abundance of systemic risk in DeFi has been seen in the Luna/UST death spiral and various liquidity attacks, while project teams are incentivized to overlook these risks for maximum profit.
We can look forward to a future which is increasingly multi-chain and one that empowers interoperability between metaverses across these chains. Cross-chain infrastructure has a place in the space to open up new use cases and accrue value for users and their assets. It’s in fact extremely vital to make this future a reality, although it comes with a high risk of exploitation.
What should come first is the user experience, particularly for metaverse users who wish to hop between networks: it should be completely seamless and carry a low barrier to entry.
Some form of centralization within DeFi is inevitable for strategic decision-making as smart contracts are unable to cover all possible scenarios at this point. When we look to move assets between platforms, we should expect there to be some form of concentrated power which takes control over critical issues.
MetaFi is a nascent concept and we won’t see it grow into fruition for a while. There is plenty of time to make metaverses on the blockchain as safe as possible while allowing for maximum interoperability. It depends on execution and the stability of these platforms, and this comes down to the decisions made by the team in question.
About the Author
Tom Tirman is the CEO of IQ Protocol, the leading NFT renting solution that allows games and other platforms to wrap digital assets and lend them out to users looking to play and earn. Before crypto, Tim graduated from a top technological university in Eastern Europe for Law and proceeded to continue his studies at the Stockholm School of Economics. In his free time, he also spearheads PARSIQ, a web3 data aggregator.
